Abstract
We generalize the factor stochastic volatility (FSV) model of Pitt and Shephard [1999. Time varying covariances: a factor stochastic volatility approach (with discussion). In: Bernardo, J.M., Berger, J.O., Dawid, A.P., Smith, A.F.M. (Eds.), Bayesian Statistics, vol. 6, Oxford University Press, London, pp. 547-570.] and Aguilar and West [2000. Bayesian dynamic factor models and variance matrix discounting for portfolio allocation. J. Business Econom. Statist. 18, 338-357.] in two important directions. First, we make the FSV model more flexible and able to capture more general time-varying variance-covariance structures by letting the matrix of factor loadings to be time dependent. Secondly, we entertain FSV models with jumps in the common factors volatilities through So, Lam and Li's [1998. A stochastic volatility model with Markov switching. J. Business Econom. Statist. 16, 244-253.] Markov switching stochastic volatility model. Novel Markov Chain Monte Carlo algorithms are derived for both classes of models. We apply our methodology to two illustrative situations: daily exchange rate returns [Aguilar, O., West, M., 2000. Bayesian dynamic factor models and variance matrix discounting for portfolio allocation. J. Business Econom. Statist. 18, 338-357.] and Latin American stock returns [Lopes, H.F., Migon, H.S., 2002. Comovements and contagion in emergent markets: stock indexes volatilities. In: Gatsonis, C., Kass, R.E., Carriquiry, A.L., Gelman, A., Verdinelli, I. Pauler, D., Higdon, D. (Eds.), Case Studies in Bayesian Statistics, vol. 6, pp. 287-302].
Original language | English (US) |
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Pages (from-to) | 3082-3091 |
Number of pages | 10 |
Journal | Journal of Statistical Planning and Inference |
Volume | 137 |
Issue number | 10 |
DOIs | |
State | Published - Oct 1 2007 |
Externally published | Yes |
Keywords
- Bayesian inference
- Dynamic models
- Factor analysis
- Markov switching
- Variance decomposition
ASJC Scopus subject areas
- Statistics and Probability
- Statistics, Probability and Uncertainty
- Applied Mathematics