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Multivariate return decomposition: theory and implications

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Abstract

In this paper, we propose a model based on multivariate decomposition of multiplicative?absolute values and signs?components of several returns. In the m-variate case, the marginals for the m absolute values and the binary marginals for the m directions are linked through a 2m-dimensional copula. The approach is detailed in the case of a bivariate decomposition. We outline the construction of the likelihood function and the computation of different conditional measures. The finite-sample properties of the maximum likelihood estimator are assessed by simulation. An application to predicting bond returns illustrates the usefulness of the proposed method.

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  • Stanislav Anatolyev & Nikolay Gospodinov, 2015. "Multivariate return decomposition: theory and implications," FRB Atlanta Working Paper 2015-7, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:2015-07
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    Cited by:

    1. Stanislav Anatolyev, 2021. "Directional news impact curve," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(1), pages 94-107, January.
    2. Chen, Nan-Kuang & Chen, Shiu-Sheng & Chou, Yu-Hsi, 2017. "Further evidence on bear market predictability: The role of the external finance premium," International Review of Economics & Finance, Elsevier, vol. 50(C), pages 106-121.
    3. Nikolay Gospodinov, 2017. "Asset Co-movements: Features and Challenges," FRB Atlanta Working Paper 2017-11, Federal Reserve Bank of Atlanta.

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    More about this item

    Keywords

    multivariate decomposition; multiplicative components; volatility and direction models; copula; dependence;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • 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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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