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Time-varying general dynamic factor models and the measurement of financial connectedness

Author

Listed:
  • Barigozzi, Matteo

    (Università di Bologna, Italy)

  • Hallin, Marc

    (ULB)

  • Soccorsi, Stefano

    (Lancaster University Management School, UK)

  • von Sachs, Rainer

    (Université catholique de Louvain, LIDAM/ISBA, Belgium)

Abstract

We propose a new time-varying Generalized Dynamic Factor Model for high-dimensional, locally stationary time series. Estimation is based on dynamic principal component analysis jointly with singular VAR estimation, and extends to the locally stationary case the one-sided estimation method proposed by Forni et al. (2017) for stationary data. We prove consistency of our estimators of time-varying impulse response functions as both the sample size and the dimension of the time series grow to infinity. This approach is used in an empirical application in order to construct a time-varying measure of financial connectedness for a large panel of adjusted intra-day log ranges of stocks. We show that large increases in long-run connectedness are associated with the main financial turmoils. Moreover, we provide evidence of a significant heterogeneity in the dynamic responses to common shocks in time and over different scales, as well as across industrial sectors.

Suggested Citation

  • Barigozzi, Matteo & Hallin, Marc & Soccorsi, Stefano & von Sachs, Rainer, 2020. "Time-varying general dynamic factor models and the measurement of financial connectedness," LIDAM Reprints ISBA 2020015, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    • Handle: RePEc:aiz:louvar:2020015
    DOI: https://doi.org/10.1016/j.jeconom.2020.07.004
    Note: In: The Journal of Econometrics, to appear, (2020)
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    JEL classification:

    • 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
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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