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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

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 2001-08.

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

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Keywords: Stock market ; Asia;

References

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Cited by:
  1. Gabriele Fiorentini & Giorgio Calzolari & Enrique Sentana, 2007. "Indirect estimation of large conditionally heteroskedastic factor models, with an application to the Dow 30 stocks," Working Paper Series 40-07, The Rimini Centre for Economic Analysis, revised Jul 2007.

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