Connor, Gregory (2006) The common and specific components of dynamic volatility. Journal of Econometrics, 132 (1). pp. 231-255. ISSN 0304-4076
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Abstract
This paper develops a dynamic approximate factor model in which returns are time-series
heteroskedastic. The heteroskedasticity has three components: a factor-related component, a
common asset-specific component, and a purely asset-specific component. We develop a new
multivariate GARCH model for the factor-related component. We develop a univariate
stochastic volatility model linked to a cross-sectional series of individual GARCH models for
the common asset-specific component and the purely asset-specific component. We apply the
analysis to monthly US equity returns for the period January 1926 to December 2000. We find
that all three components contribute to the heteroskedasticity of individual equity returns.
Factor volatility and the common component in asset-specific volatility have long-term secular
trends as well as short-term autocorrelation. Factor volatility has correlation with interest
rates and the business cycle.
Item Type: | Article |
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Keywords: | APT; ARCH; Factor models; Principal components; Volatility; |
Academic Unit: | Faculty of Social Sciences > Economics, Finance and Accounting |
Item ID: | 8433 |
Depositing User: | Gregory Connor |
Date Deposited: | 11 Jul 2017 15:12 |
Journal or Publication Title: | Journal of Econometrics |
Publisher: | Elsevier |
Refereed: | Yes |
Related URLs: | |
URI: | https://mural.maynoothuniversity.ie/id/eprint/8433 |
Use Licence: | This item is available under a Creative Commons Attribution Non Commercial Share Alike Licence (CC BY-NC-SA). Details of this licence are available here |
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