Multivariate return decomposition: theory and implications
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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| Length: | 31 pages |
| Date of creation: | 01 Aug 2015 |
| Handle: | RePEc:fip:fedawp:2015-07 |
| Contact details of provider: | Postal: 1000 Peachtree St., N.E., Atlanta, Georgia 30309 Phone: 404-521-8500 Web page: http://www.frbatlanta.org/ Email: More information through EDIRC
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References listed on IDEAS
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- Anatolyev, Stanislav & Gospodinov, Nikolay, 2010. "Modeling Financial Return Dynamics via Decomposition," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(2), pages 232-245.
- Liu, Xiaochun & Luger, Richard, 2015. "Unfolded GARCH models," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 186-217.
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