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TVICA—Time varying independent component analysis and its application to financial data

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  • Chen, Ray-Bing
  • Chen, Ying
  • Härdle, Wolfgang K.

Abstract

A new method of ICA, TVICA, is proposed. Compared to the conventional ICA, the TVICA method allows the mixing matrix to be time dependent. Estimation is conducted under local homogeneity that assumes at any particular time point, there exists an interval over which the mixing matrix can be well approximated as constant. A sequential log likelihood-ratio testing procedure is used to automatically identify such local intervals. Numerical analysis demonstrates that TVICA provides good performance in homogeneous situations and does improve accuracy in nonstationary settings with possible structural change. In real data analysis with application to risk management, the TVICA confirms a superior performance when compared to several alternatives, including ICA, PCA and DCC-based models.

Suggested Citation

  • Chen, Ray-Bing & Chen, Ying & Härdle, Wolfgang K., 2014. "TVICA—Time varying independent component analysis and its application to financial data," Computational Statistics & Data Analysis, Elsevier, vol. 74(C), pages 95-109.
  • Handle: RePEc:eee:csdana:v:74:y:2014:i:c:p:95-109
    DOI: 10.1016/j.csda.2014.01.002
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    Cited by:

    1. Robinson, Peter & Taylor, Luke, 2017. "Adaptive estimation in multiple time series with independent component errors," LSE Research Online Documents on Economics 68345, London School of Economics and Political Science, LSE Library.
    2. repec:bla:jtsera:v:38:y:2017:i:2:p:191-203 is not listed on IDEAS

    More about this item

    Keywords

    Adaptive methods; Local homogeneity; Portfolio risk analysis; Sequential testing;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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