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Estimation of a Nonlinear Common Factor Model

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  • George Richards

Abstract

The present paper applies a novel methodology for the estimation of nonlinear common factor models. Instead of relying on a multivariate GARCH approach, we use a new method for modelling and forecasting correlation matrices such that correlation can be driven nonlinearly by common factors. Using daily data for virtual currency we show that the adopted nonlinear common factor approach simplifies estimation in high-dimensional settings and provides more flexibility compared to factor-based methods.

Suggested Citation

  • George Richards, 2018. "Estimation of a Nonlinear Common Factor Model," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 61(1), pages 1-28.
    • Handle: RePEc:eei:journl:v:61:y:2018:i:1:p:1-28
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    More about this item

    Keywords

    Multivariate GARCH; Nonlinear Common Factor Model.;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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