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Dynamic Factor Multivariate GARCH ModelAndre A. P. SantosUniversidade Federal de Santa Catarina (UFSC) - Department of Economics Guilherme V. MouraUniversidade Federal de Santa Catarina (UFSC) - Department of Economics June 24, 2012 Forthcoming, Computational Statistics and Data Analysis Abstract: Factor models are well established as promising alternatives to obtain covariance matrices of portfolios containing a very large number of assets. In this paper, we consider a novel multivariate factor GARCH speci cation with a flexible modeling strategy for the common factors, for the individual assets, and for the factor loads. We apply the proposed model to obtain minimum variance portfolios of all stocks that belonged to the S&P100 during the sample period and show that it delivers less risky portfolios in comparison to benchmark models, including existing factor approaches.
Number of Pages in PDF File: 27 Keywords: dynamic conditional correlation (DCC), forecasting, Kalman filter, learning, CAPM, performance evaluation, Sharpe ratio Accepted Paper SeriesDate posted: July 17, 2012 ; Last revised: October 9, 2012Suggested CitationContact Information
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