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Generalized dynamic factor model + GARCH: exploiting multivariant information for univariate prediction

By Lucia Alessi, Matteo Barigozzi and Marco Capasso

Abstract

We propose a new model for volatility forecasting which combines the Generalized Dynamic Factor Model (GDFM) and the GARCH model. The GDFM, applied to a large number of series, captures the multivariate information and disentangles the common and the idiosyncratic part of each series of returns. In this financial analysis, both these components are modeled as a GARCH.We compare GDFM+GARCH and standard GARCH performance on two samples up to 171 series, providing one-step-ahead volatility predictions of returns. The GDFM+GARCH model outperforms the standard GARCH in most cases. These results are robust with respect to different volatility proxies

Topics: HA Statistics, HB Economic Theory
Publisher: Laboratory of Economics and Management (LEM)
Year: 2007
OAI identifier: oai:eprints.lse.ac.uk:31182
Provided by: LSE Research Online
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