23º SINAPE - Simpósio Nacional de Probabilidade e Estatística

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Título

ON THE ROBUSTNESS OF THE PRINCIPAL VOLATILITY COMPONENTS

Resumo

In this paper, we analyse the recent principal volatility components analysis procedure. The procedure overcomes several difficulties in modelling and forecasting the conditional covariance matrix in large dimensions arising from the curse of dimensionality. We show that outliers have a devastating effect on the construction of the principal volatility components and on the forecast of the conditional covariance matrix and consequently in economic and financial applications based on this forecast. We propose a robust procedure and analyse its finite sample properties by means of Monte Carlo experiments and also illustrate it using empirical data. The robust procedure outperforms the classical method in simulated and empirical data.

Palavras-chave

Conditional covariance matrix; Constant volatility; Curse of dimensionality; Jumps; Outliers; Principal components

Área

Séries Temporais e Econometria

Autores

Carlos Trucíos, Luiz K Hotta, Pedro L Valls Pereira