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A Metropolis-in-Gibbs Sampler for Estimating Equity Market Factors

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  • Sarantis Tsiaplias

    ()
    (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne)

Abstract

A model incorporating common Markovian regimes and GARCH residuals in a persistent factor environment is considered. Given the intractable and approximate nature of the likelihood function, a Metropolis-in-Gibbs sampler with Bayesian features is constructed for estimation purposes. The common factor drawing procedure is effectively an exact derivation of the Kalman filter with a Markovian regime component and GARCH innovations. To accelerate the drawing procedure, approximations to the conditional density of the common component are considered. The model is applied to equity data for 18 developed markets to derive global, European, and country specific equity market factors.

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Bibliographic Info

Paper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2007n18.

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Length: 52 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:iae:iaewps:wp2007n18

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Keywords: Common factors; Kalman filter; Markov switching; Monte Carlo; GARCH; Equities;

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References

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Cited by:
  1. Sarantis Tsiaplias, 2007. "The Macroeconomic Content of Equity Market Factors," Melbourne Institute Working Paper Series wp2007n23, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  2. Tsiaplias, Sarantis, 2008. "Factor estimation using MCMC-based Kalman filter methods," Computational Statistics & Data Analysis, Elsevier, vol. 53(2), pages 344-353, December.
  3. Sarantis Tsiaplias, 2007. "Co-movement and Integration among Developed Equity Markets," Melbourne Institute Working Paper Series wp2007n25, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.

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