Advanced Search
MyIDEAS: Login to save this paper or follow this series

Conditionally Heteroskedastic Factor Models: Identification and Instrumental Variables Estimation

Contents:

Author Info

  • Catherine Doz
  • Éric Renault

    ()

Abstract

This paper provides a semiparametric framework for modelling multivariate conditional heteroskedasticity. First, we show that stochastic volatility factor models with possibly cross-correlated disturbances cannot be identified from returns conditional variance structure only, except when strong restrictions on the support of the probability distribution of latent factors volatility are maintained. Second, we provide an alternative way to maintain identifying restrictions through either higher order moments or through a specification of risk premiums based on constant prices of factor risks. In both cases, identification is obtained with conditional moment restrictions which pave the way for instrumental variables estimation and inference. A preliminary step of determination of the number of factors and identification of mimicking portfolios is proposed through a sequence of GMM overidentification tests which encompass Engle and Kozicki (1993) tests for common features. Cet article propose un cadre semi-paramétrique adapté à la modélisation de l'hétéroscédasticité conditionnelle multivariée. Nous montrons d'abord qu'un modèle factoriel à volatilité stochastique ne peut pas être identifié seulement à partir de la structure de variance conditionnelle des rendements, sauf si l'on impose des restrictions importantes au support de la loi de probabilité des facteurs latents. Nous proposons ensuite des restrictions alternatives permettant d'identifier le modèle de volatilité multivariée. Ces restrictions portent soit sur les moments d'ordre supérieur, soit sur une spécification de la prime de risque fondée sur un prix constant du risque des facteurs. Dans les deux cas, l'identification du modèle est obtenue à partir de restrictions sur les moments conditionnels, ce qui permet l'estimation par variables instrumentales. Une étape préliminaire de détermination du nombre de facteurs et d'identification de portefeuilles représentatifs est proposée. Elle est fondée sur une séquence de tests de sur-identification qui englobe les tests de caractéristiques communes d'Engle et Kozicki (1993).

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cirano.qc.ca/pdf/publication/2004s-37.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2004s-37.

as in new window
Length:
Date of creation: 01 Jun 2004
Date of revision:
Handle: RePEc:cir:cirwor:2004s-37

Contact details of provider:
Postal: 2020 rue University, 25e étage, Montréal, Quéc, H3A 2A5
Phone: (514) 985-4000
Fax: (514) 985-4039
Email:
Web page: http://www.cirano.qc.ca/
More information through EDIRC

Related research

Keywords: asset pricing; stochastic volatility; conditional factor models; multivariate conditional heteroskedasticity; common features; multiperiod conditional moment restrictions; Generalized Method of Moments.; évaluation d'actifs financiers; volatilité stochastique; modèles conditionnels à facteurs; hétéroscédasticité conditionnelle multivariée; caractéristiques communes; restrictions de moments conditionnels avec retards; Méthode des Moments Généralisés;

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Harvey, Andrew & Ruiz, Esther & Shephard, Neil, 1994. "Multivariate Stochastic Variance Models," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(2), pages 247-64, April.
  2. Francis X. Diebold & Marc Nerlove, 1986. "The dynamics of exchange rate volatility: a multivariate latent factor ARCH model," Special Studies Papers 205, Board of Governors of the Federal Reserve System (U.S.).
  3. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 11(4), pages 369-80, October.
  4. Mervyn King & Enrique Sentana & Sushil Wadhwani, 1990. "Volatiltiy and Links Between National Stock Markets," NBER Working Papers 3357, National Bureau of Economic Research, Inc.
  5. Drost, Feike C & Nijman, Theo E, 1993. "Temporal Aggregation of GARCH Processes," Econometrica, Econometric Society, Econometric Society, vol. 61(4), pages 909-27, July.
  6. Darrell Duffie & Jun Pan & Kenneth Singleton, 1999. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," NBER Working Papers 7105, National Bureau of Economic Research, Inc.
  7. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-43.
  8. Robert F. Engle & Victor Ng & Michael Rothschild, 1988. "Asset Pricing with a Factor Arch Covariance Structure: Empirical Estimates for Treasury Bills," NBER Technical Working Papers 0065, National Bureau of Economic Research, Inc.
  9. Ng, Victor & Engle, Robert F. & Rothschild, Michael, 1992. "A multi-dynamic-factor model for stock returns," Journal of Econometrics, Elsevier, Elsevier, vol. 52(1-2), pages 245-266.
  10. Lars Peter Hansen & Kenneth J. Singleton, 1997. "Efficient Estimation of Linear Asset Pricing Models with Moving-Average Errors," NBER Technical Working Papers 0086, National Bureau of Economic Research, Inc.
  11. Sargan, J D, 1983. "Identification and Lack of Identification," Econometrica, Econometric Society, Econometric Society, vol. 51(6), pages 1605-33, November.
  12. Ghysels, E. & Harvey, A. & Renault, E., 1995. "Stochastic Volatility," Papers, Toulouse - GREMAQ 95.400, Toulouse - GREMAQ.
  13. Manuel Arellano & Lars Peter Hansen & Enrique Sentana, 2009. "Underidentification?," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP24/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  14. Engle, Robert F & Kozicki, Sharon, 1993. "Testing for Common Features: Reply," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 11(4), pages 393-95, October.
  15. Gabriele Fiorentini & Enrique Sentana & Neil Shephard, 2003. "Likelihood-based estimation of latent generalised ARCH structures," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 24852, London School of Economics and Political Science, LSE Library.
  16. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(1), pages 116-31, February.
  17. Neil Shephard, 2005. "Stochastic Volatility," Economics Papers 2005-W17, Economics Group, Nuffield College, University of Oxford.
  18. Robert Engle, 2002. "New frontiers for arch models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 17(5), pages 425-446.
  19. Sentana, E., 2000. "Factor Representing Portfolios in Large Asset Markets," Papers, Centro de Estudios Monetarios Y Financieros- 0001, Centro de Estudios Monetarios Y Financieros-.
  20. Nour Meddahi & Éric Renault, 2000. "Temporal Aggregation of Volatility Models," CIRANO Working Papers, CIRANO 2000s-22, CIRANO.
  21. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 987-1007, July.
  22. Sentana, E., 1997. "The Relation Between Conditionally Heteroskedastic Factor Models amd Factor GARCH Models," Papers, Centro de Estudios Monetarios Y Financieros- 9719, Centro de Estudios Monetarios Y Financieros-.
  23. Sentana, E. & Fiorentini, G., 1997. "Identification, Estimation and Testing of Conditionally Heteroskedastic Factor Model," Papers, Centro de Estudios Monetarios Y Financieros- 9709, Centro de Estudios Monetarios Y Financieros-.
  24. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  25. Prosper Dovonon, 2013. "Conditionally Heteroskedastic Factor Models With Skewness And Leverage Effects," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(7), pages 1110-1137, November.
  26. Ole E. Barndorff-Nielsen & Neil Shephard, 2001. "Non-Gaussian Ornstein-Uhlenbeck-based models and some of their uses in financial economics," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 63(2), pages 167-241.
  27. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Anderson, Heather M. & Vahid, Farshid, 2007. "Forecasting the Volatility of Australian Stock Returns: Do Common Factors Help?," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 25, pages 76-90, January.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cir:cirwor:2004s-37. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Webmaster).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.