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A threshold factor multivariate stochastic volatility model

Author

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  • Mike K. P. So

    (Hong Kong University of Science and Technology, Hong Kong)

  • C. Y. Choi

    (Hong Kong University of Science and Technology, Hong Kong)

Abstract

A new multivariate stochastic volatility model is developed in this paper. The main feature of this model is to allow threshold asymmetry in a factor covariance structure. The new model provides a parsimonious characterization of volatility and correlation asymmetry in response to market news. Statistical inferences are drawn from Markov chain Monte Carlo methods. We introduce news impact analysis to analyze volatility asymmetry with a factor structure. This analysis helps us to study different responses of volatility to historical market information in a multivariate volatility framework. Our model is successful when applied to an extensive empirical study of twenty stocks. Copyright © 2009 John Wiley & Sons, Ltd.

Suggested Citation

  • Mike K. P. So & C. Y. Choi, 2009. "A threshold factor multivariate stochastic volatility model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(8), pages 712-735.
    • Handle: RePEc:jof:jforec:v:28:y:2009:i:8:p:712-735
    DOI: 10.1002/for.1123
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    Cited by:

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    2. Ishihara, Tsunehiro & Omori, Yasuhiro, 2012. "Efficient Bayesian estimation of a multivariate stochastic volatility model with cross leverage and heavy-tailed errors," Computational Statistics & Data Analysis, Elsevier, vol. 56(11), pages 3674-3689.
    3. Tsunehiro Ishihara & Yasuhiro Omori, 2017. "Portfolio optimization using dynamic factor and stochastic volatility: evidence on Fat-tailed errors and leverage," The Japanese Economic Review, Springer, vol. 68(1), pages 63-94, March.
    4. Mao, Xiuping & Ruiz, Esther & Veiga, Helena, 2017. "Threshold stochastic volatility: Properties and forecasting," International Journal of Forecasting, Elsevier, vol. 33(4), pages 1105-1123.
    5. So, Mike K.P. & Chan, Thomas W.C. & Chu, Amanda M.Y., 2022. "Efficient estimation of high-dimensional dynamic covariance by risk factor mapping: Applications for financial risk management," Journal of Econometrics, Elsevier, vol. 227(1), pages 151-167.
    6. Benjamin Poignard & Manabu Asai, 2023. "High‐dimensional sparse multivariate stochastic volatility models," Journal of Time Series Analysis, Wiley Blackwell, vol. 44(1), pages 4-22, January.
    7. Liu, Qingfu & Wong, Ieokhou & An, Yunbi & Zhang, Jinqing, 2014. "Asymmetric Information and Volatility Forecasting in Commodity Futures Markets," Pacific-Basin Finance Journal, Elsevier, vol. 26(C), pages 79-97.

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