On the Robustness of the Principal Volatility Components

37 Pages Posted: 19 Mar 2018 Last revised: 12 Dec 2018

See all articles by Carlos Trucíos

Carlos Trucíos

University of Campinas (UNICAMP) - Department of Statistics

Luiz Koodi Hotta

University of Campinas (UNICAMP) - Department of Statistics

Pedro L. Valls Pereira

Sao Paulo School of Economics - FGV and CEQEF- FGV

Date Written: March 19, 2018

Abstract

In this paper, we analyse the recent principal volatility components analysis procedure. The procedure overcomes several difficulties in modelling and forecasting the conditional covariance matrix in large dimensions arising from the curse of dimensionality. We show that outliers have a devastating effect on the construction of the principal volatility components and on the forecast of the conditional covariance matrix and consequently in economic and financial applications based on this forecast. We propose a robust procedure and analyse its finite sample properties by means of Monte Carlo experiments and also illustrate it using empirical data. The robust procedure outperforms the classical method in simulated and empirical data.

Keywords: Conditional Covariance Matrix, Constant Volatility, Curse of Dimensionality, Jumps, Outliers, Principal Components

JEL Classification: C13, C51, C53, C55, G17

Suggested Citation

Trucíos Maza, Carlos César and Hotta, Luiz Koodi and Valls Pereira, Pedro L., On the Robustness of the Principal Volatility Components (March 19, 2018). Available at SSRN: https://ssrn.com/abstract=3143870 or http://dx.doi.org/10.2139/ssrn.3143870

Carlos César Trucíos Maza (Contact Author)

University of Campinas (UNICAMP) - Department of Statistics ( email )

Campinas, São Paulo, 13083-859
Brazil

Luiz Koodi Hotta

University of Campinas (UNICAMP) - Department of Statistics ( email )

Campinas, São Paulo 13083-859
Brazil

Pedro L. Valls Pereira

Sao Paulo School of Economics - FGV and CEQEF- FGV ( email )

Rua Itapeva 474 room 1006
São Paulo, São Paulo 01332-000
Brazil
55+11+37993726 (Phone)
55+11+37993357 (Fax)

HOME PAGE: http://sites.google.com/site/pedrovallspereira

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