Quotation Kastner, Gregor, Frühwirth-Schnatter, Sylvia, Lopes, Hedibert Freitas. 2015. Sparse Bayesian Latent Factor Stochastic Volatility Models for High-Dimensional Financial Time Series. 2nd Vienna Workshop on High-Dimensional Time Series in Macroeconomics and Finance, IHS Wien, Österreich, 21.05-22.05.


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Abstract

Dynamic covariance estimation for multivariate time series suffers from the curse of dimensionality; this renders parsimonious approaches essential for conducting reliable statistical inference. We address this issue by modeling the underlying volatility dynamics of a time series vector through a lower dimensional collection of latent time-varying stochastic factors. Furthermore, we apply a Normal-Gamma prior to the elements of the factor loadings matrix. This hierarchical shrinkage prior is a generalization of the Bayesian lasso and effectively pulls the factor loadings of unimportant factors towards zero, thereby increasing sparsity even more. Estimation is carried out via Bayesian MCMC methods that allow to obtain draws from the high-dimensional posterior and predictive distributions. To guarantee efficiency of the samplers, we utilize several variants of an ancillarity-sufficiency interweaving strategy (ASIS) for sampling the factor loadings. Through extensive simulation studies, we demonstrate the effectiveness of the approach. Furthermore, we apply the model to a 20-dimensional exchange rate series and a 300-dimensional vector of stock returns to evaluate predictive performance.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Paper presented at an academic conference or symposium
Language English
Title Sparse Bayesian Latent Factor Stochastic Volatility Models for High-Dimensional Financial Time Series
Event 2nd Vienna Workshop on High-Dimensional Time Series in Macroeconomics and Finance
Year 2015
Date 21.05-22.05
Country Austria
Location IHS Wien
URL https://www.ihs.ac.at/conferences/timeseries/

Associations

People
Kastner, Gregor (Details)
Frühwirth-Schnatter, Sylvia (Details)
External
Lopes, Hedibert Freitas (Insper, Brazil)
Organization
Institute for Statistics and Mathematics IN (Details)
Research areas (ÖSTAT Classification 'Statistik Austria')
1105 Computer software (Details)
1162 Statistics (Details)
5323 Econometrics (Details)
5701 Applied statistics (Details)
5707 Time series analysis (Details)
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