A Stochastic Variance Factor Model for Large Datasets and an Application to S&P Data

Economics Letters, Vol. 100, pp. 130–134, 2008

Posted: 16 May 2009

See all articles by George Kapetanios

George Kapetanios

King's College, London

Andrea Cipollini

University of Palermo - d/SEAS; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN)

Date Written: July 1, 2008

Abstract

The aim of this paper is to consider multivariate stochastic volatility models for large dimensional datasets. We suggest the use of the principal component methodology of Stock and Watson [Stock, J.H., Watson, M.W., 2002. Macroeconomic forecasting using diffusion indices. Journal of Business and Economic Statistics, 20, 147–162] for the stochastic volatility factor model discussed by Harvey, Ruiz, and Shephard [Harvey, A.C., Ruiz, E., Shephard, N., 1994. Multivariate Stochastic Variance Models. Review of Economic Studies, 61, 247–264]. We provide theoretical and Monte Carlo results on this method and apply it to S&P data.

Keywords: Stochastic volatility, Factor models, Principal components

JEL Classification: C32, C33, G12

Suggested Citation

Kapetanios, George and Cipollini, Andrea, A Stochastic Variance Factor Model for Large Datasets and an Application to S&P Data (July 1, 2008). Economics Letters, Vol. 100, pp. 130–134, 2008. Available at SSRN: https://ssrn.com/abstract=1405816

George Kapetanios

King's College, London ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom
+44 20 78484951 (Phone)

Andrea Cipollini (Contact Author)

University of Palermo - d/SEAS ( email )

Viale delle Scienze, edificio 13
Palermo, 90124
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics ( email )

Viale Berengario 51
41100 Modena, Modena 41100
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN) ( email )

via Berengario 51
Modena, modena I-41100
Italy

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