Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2019-02-19
Revision-Date: 2019-10-23
Number: 19-013/IV
Author-Name: Anne Opschoor
Author-Workplace-Name: Vrije Universiteit Amsterdam
Author-Name: André Lucas
Author-Workplace-Name: Vrije Universiteit Amsterdam
Author-Name: Istvan Barra
Author-Workplace-Name: Independent Research
Author-Name: Dick van Dijk
Author-Workplace-Name: Erasmus University Rotterdam
Title: Closed-Form Multi-Factor Copula Models with Observation-Driven Dynamic Factor Loadings
Abstract: We develop new multi-factor dynamic copula models with time-varying factor loadings and observation-driven dynamics. The new models are highly flexible, scalable to high dimensions, and ensure positivity of covariance and correlation matrices. A closed-form likelihood expression allows for straightforward parameter estimation and likelihood in- ference. We apply the new model to a large panel of 100 U.S. stocks over the period 2001Đ2014. The proposed multi-factor structure is much better than existing (single- factor) models at describing stock return dependence dynamics in high-dimensions. The new factor models also improve one-step-ahead copula density forecasts and global min- imum variance portfolio performance. Finally, we investigate different mechanisms to allocate firms into groups and find that a simple industry classification outperforms al- ternatives based on observable risk factors, such as size, value or momentum.
Classification-JEL: C32, C58, G17
Keywords: factor copulas, factor structure, score-driven dynamics, multivariate density forecast
File-URL: https://papers.tinbergen.nl/19013.pdf
File-Format: application/pdf
File-Size: 1132511 bytes
Handle: RePEc:tin:wpaper:20190013