Estimating and Forecasting Large Panels of Volatilities with Approximate Dynamic Factor Models
19 Pages Posted: 14 Sep 2011 Last revised: 1 Aug 2013
Date Written: March 28, 2012
We introduce an approximate dynamic factor model for modeling and forecasting large panels of realized volatilities. Since the model is estimated by means of principal components and low dimensional maximum likelihood, it does not suffer from the curse of dimensionality. We apply the model to a panel of 90 daily realized volatilities pertaining to S&P100 from January 2001 to December 2008. Results show that our model is able to capture the stylized facts of panels of volatilities (comovements, clustering, long memory, dynamic volatility, skewness and heavy tails), and that it performs fairly well in forecasting, in particular in period of turmoil in which it outperforms standard univariate benchmarks.
Keywords: Realized volatilities, vast dimensions, factor models, long memory, forecasting
JEL Classification: C32, C51, G01
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