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Factor analysis of a model of stock market returns using simulation-based estimation techniques

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Diana Zhumabekova
Mardi Dungey

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Abstract

A dynamic latent factor model of stock market returns is estimated using simulation-based techniques. Stock market volatility is decomposed into common and idiosyncratic components, and volatility decompositions are compared between stable and turmoil periods to test for possible shift-contagion in equity markets during Asian financial crisis. Five core Asian emerging stock markets are analyzed—Thailand, Indonesia, Korea, Malaysia and the Philippines. Results identify the existence of shift-contagion during the crisis and indicate that the Thai market was a trigger for contagious shock transmission. ; Monte Carlo experiments are conducted to compare simulation method of moments and indirect inference estimation techniques. Consistent with the literature such experiments find that, in the presence of autocorrelation and time-varying volatility, indirect inference is a better method of conducting variance decomposition analysis for stock market returns than the conventional method of moments.

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Paper provided by Federal Reserve Bank of San Francisco in its series Pacific Basin Working Paper Series with number 01-08.

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Date of creation: 2001
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Handle: RePEc:fip:fedfpb:01-08

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Keywords: Stock market ; Asia;

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  5. Robert F. Engle & Takatoshi Ito & Wen-Ling Lin, 1991. "Meteor Showers or Heat Waves? Heteroskedastic Intra-Daily Volatility in the Foreign Exchange Market," NBER Working Papers 2609, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Smith, A A, Jr, 1993. "Estimating Nonlinear Time-Series Models Using Simulated Vector Autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages S63-84, Suppl. De. [Downloadable!] (restricted)
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  8. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October. [Downloadable!] (restricted)
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  9. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September. [Downloadable!]
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  15. Kaminsky, Graciela L. & Schmukler, Sergio L., 1999. "What triggers market jitters?: A chronicle of the Asian crisis," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 537-560, August. [Downloadable!] (restricted)
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  16. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59. [Downloadable!] (restricted)
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  21. Andersen, Torben G. & Chung, Hyung-Jin & Sorensen, Bent E., 1999. "Efficient method of moments estimation of a stochastic volatility model: A Monte Carlo study," Journal of Econometrics, Elsevier, vol. 91(1), pages 61-87, July. [Downloadable!] (restricted)
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  24. Giancarlo Corsetti & Marcello Pericoli & Massimo Sbracia, 2001. "Correlation Analysis of Financial Contagion: What One Should Know before Running a Test," Temi di discussione (Economic working papers) 408, Bank of Italy, Economic Research Department. [Downloadable!]
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  25. Tauchen, George E. & Gallant, A. Ronald, 1995. "Which Moments to Match," Working Papers 95-20, Duke University, Department of Economics.
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