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A0378
Title: Generalized dynamic factor models and volatilities Authors:  Matteo Barigozzi - Università di Bologna (Italy) [presenting]
Marc Hallin - Universite Libre de Bruxelles (Belgium)
Abstract: In large panels of time series with a dynamic factor structure on the levels or returns, the volatilities of the common and idiosyncratic components are often strongly correlated suggesting the presence of common volatility shocks, i.e. they also admit a dynamic factor decomposition. Based on this observation, we propose an entirely non-parametric and model-free two-step general dynamic factor approach which accounts for the factor structure both of returns and of volatilities. We propose a two-step estimation procedure based on one-sided representations of dynamic factor models, and we give some preliminary conditions for consistent estimation of common components of volatilities when both $n$ and $T$ are large. Finally, we apply our method to the panel of SP100 asset returns in order to build GARCH based volatility forecasts. Results show that our approach is superior to existing univariate and multivariate methods when predicting daily highlow range.