Factor multivariate stochastic volatility models of high dimension
Abstract
Building upon factor decomposition to overcome the curse of dimensionality inherent in multivariate volatility processes, we develop a factor model-based multivariate stochastic volatility (fMSV) framework. We propose a two-stage estimation procedure for the fMSV model: in the first stage, estimators of the factor model are obtained, and in the second stage, the MSV component is estimated using the estimated common factor variables. We derive the asymptotic properties of the estimators, taking into account the estimation of the factor variables. The prediction performances are illustrated by finite-sample simulation experiments and applications to portfolio allocation.
Fields of Study & Subjects
Financial Risk and Volatility Modeling
Complex Systems and Time Series Analysis
Stochastic processes and financial applications
Publication details
- Journal / source
- Econometric Reviews
- Publisher
- Informa UK Limited
- Volume
- 45
- Issue
- 8
- Pages
- 1198–1229
- Publication date
- 7 June 2026
- Language
- EN