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Estimating and forecasting large panels of volatilities with approximate dynamic factor models

par Luciani, Matteo ;Veredas, David
Référence Journal of forecasting, 34, 3, page (163-176)
Publication Publié, 2015-04

Article révisé par les pairs

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Résumé :

We introduce an approximate dynamic factor model for modeling and forecasting large panels of realized volatilities. Since the model is estimated by means of principal components and low-dimensional maximum likelihood, it does not suffer from the curse of dimensionality. We apply the model to a panel of 90 daily realized volatilities pertaining to SandP 100 from January 2001 to December 2008. Results show that our model is able to capture the stylized facts of panels of volatilities (comovements, clustering, long memory, dynamic volatility, skewness and heavy tails), and that it performs fairly well in forecasting, in particular in periods of turmoil, in which it outperforms standard univariate benchmarks.