Quantile Co-Movement in Financial Markets: A Panel Quantile Model with Unobserved Heterogeneity

35 Pages Posted: 19 Apr 2017 Last revised: 6 Oct 2018

See all articles by Tomohiro Ando

Tomohiro Ando

University of Melbourne - Melbourne Business School

Jushan Bai

Columbia University

Date Written: May 31, 2018

Abstract

This paper introduces a new procedure for analyzing the quantile co-movement of a large number of financial time series based on a large-scale panel data model with factor structures. The proposed method attempts to capture the unobservable heterogeneity of each of the financial time series based on sensitivity to explanatory variables and to the unobservable factor structure. In our model, the dimension of the common factor structure varies across quantiles, and the factor structure is allowed to be correlated with the explanatory variables. The proposed method allows for both cross-sectional and serial dependence, and heteroskedasticity, which are common in financial markets.

We propose new estimation procedures for both frequentist and Bayesian frameworks. Consistency and asymptotic normality of the proposed estimator are established. We also propose a new model selection criterion for determining the number of common factors together with theoretical support.

We apply the method to analyze the returns for over 6,000 international stocks from over 60 countries during the subprime crisis, European sovereign debt crisis, and subsequent period. The empirical analysis indicates that the common factor structure varies across quantiles. We find that the common factors for the quantiles and the common factors for the mean are different.

Keywords: Data-augmentation, Endogeneity, Heterogeneous panel, Quantile factor structure, Serial and cross-sectional correlations

Suggested Citation

Ando, Tomohiro and Bai, Jushan, Quantile Co-Movement in Financial Markets: A Panel Quantile Model with Unobserved Heterogeneity (May 31, 2018). 30th Australasian Finance and Banking Conference 2017, Available at SSRN: https://ssrn.com/abstract=2953039 or http://dx.doi.org/10.2139/ssrn.2953039

Tomohiro Ando (Contact Author)

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

Jushan Bai

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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