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Independent Factor Autoregressive Conditional Density Model

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  • Alexios Ghalanos
  • Eduardo Rossi
  • Giovanni Urga

Abstract

In this article, we propose a novel Independent Factor Autoregressive Conditional Density (IFACD) model able to generate time-varying higher moments using an independent factor setup. Our proposed framework incorporates dynamic estimation of higher comovements and feasible portfolio representation within a non-elliptical multivariate distribution. We report an empirical application, using returns data from 14 MSCI equity index iShares for the period 1996 to 2010, and we show that the IFACD model provides superior VaR forecasts and portfolio allocations with respect to the Conditionally Heteroskedastic Independent Component Analysis of Generalized Orthogonal (CHICAGO) and DCC models.

Suggested Citation

  • Alexios Ghalanos & Eduardo Rossi & Giovanni Urga, 2015. "Independent Factor Autoregressive Conditional Density Model," Econometric Reviews, Taylor & Francis Journals, vol. 34(5), pages 594-616, May.
  • Handle: RePEc:taf:emetrv:v:34:y:2015:i:5:p:594-616
    DOI: 10.1080/07474938.2013.808561
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    Cited by:

    1. Yue, Wei & Wang, Yuping, 2017. "A new fuzzy multi-objective higher order moment portfolio selection model for diversified portfolios," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 465(C), pages 124-140.
    2. repec:pal:assmgt:v:19:y:2018:i:1:d:10.1057_s41260-017-0060-9 is not listed on IDEAS
    3. Basher, Syed Abul & Sadorsky, Perry, 2016. "Hedging emerging market stock prices with oil, gold, VIX, and bonds: A comparison between DCC, ADCC and GO-GARCH," Energy Economics, Elsevier, vol. 54(C), pages 235-247.
    4. Boudt, Kris & Lu, Wanbo & Peeters, Benedict, 2015. "Higher order comoments of multifactor models and asset allocation," Finance Research Letters, Elsevier, vol. 13(C), pages 225-233.

    More about this item

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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