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    The common and specific components of dynamic volatility


    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
    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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