Multivariate Return Decomposition: Theory and Implications |
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Authors: | Stanislav Anatolyev Nikolay Gospodinov |
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Affiliation: | 1. CERGE-EI, Prague, Czech Republic;2. New Economic School, Moscow, Russia;3. Research Department, Federal Reserve Bank of Atlanta, Atlanta, Georgia, USA |
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Abstract: | In this paper, we propose a model based on multivariate decomposition of multiplicative – absolute values and signs – components of asset returns. In the m-variate case, the marginals for the m absolute values and the binary marginals for the m directions are linked through a 2m-dimensional copula. The approach is detailed in the case of a bivariate decomposition. We outline the construction of the likelihood function and the computation of different conditional measures. The finite-sample properties of the maximum likelihood estimator are assessed by simulation. An application to predicting bond returns illustrates the usefulness of the proposed method. |
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Keywords: | Copula dependence multiplicative components multivariate decomposition volatility and direction models |
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