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A Structural Dynamic Factor Model for Daily Global Stock Market Returns

Author

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  • Linton, O. B.
  • Tang, H.
  • Wu, J.

Abstract

Most stock markets are open for 6-8 hours per trading day. The Asian, European and American stock markets are separated in time by time-zone differences. We propose a statistical dynamic factor model for a large number of daily returns across multiple time zones. Our model has a common global factor as well as continental factors. Under a mild fixed-signs assumption, our model is identified and has a structural interpretation. We propose several estimators of the model: the maximum likelihood estimator-one day (MLE-one day), the quasi-maximum likelihood estimator (QMLE), an improved estimator from QMLE (QMLE-md), the QMLEres (similar to MLE-one day), and a Bayesian estimator (Gibbs sampling). We establish consistency, the rates of convergence and the asymptotic distributions of the QMLE and the QMLE-md. We next provide a heuristic procedure for conducting inference for the MLE-one day and the QMLE-res. Monte Carlo simulations reveal that the MLE-one day, the QMLE-res and the QMLE-md work well. We then apply our model to two real data sets: (1) equity portfolio returns from Japan, Europe and the US; (2) MSCI equity indices of 41 developed and emerging markets. Some new insights about linkages among different markets are drawn.

Suggested Citation

  • Linton, O. B. & Tang, H. & Wu, J., 2022. "A Structural Dynamic Factor Model for Daily Global Stock Market Returns," Janeway Institute Working Papers camjip:2214, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camjip:camjip:2214
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    References listed on IDEAS

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    More about this item

    Keywords

    Daily Global Stock Market Returns; Expectation Maximization Algorithm; Minimum Distance; Quasi Maximum Likelihood; Structural Dynamic Factor Model; Time-Zone Differences;
    All these keywords.

    JEL classification:

    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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