The common and specific components of dynamic volatility

Gregory Connor*, Robert A. Korajczyk, Oliver Linton

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

20 Scopus citations

Abstract

This paper develops a dynamic approximate factor model in which returns are time-series heteroskedastic. The heteroskedasticity has three components: a factor-related component, a common asset-specific component, and a purely asset-specific component. We develop a new multivariate GARCH model for the factor-related component. We develop a univariate stochastic volatility model linked to a cross-sectional series of individual GARCH models for the common asset-specific component and the purely asset-specific component. We apply the analysis to monthly US equity returns for the period January 1926 to December 2000. We find that all three components contribute to the heteroskedasticity of individual equity returns. Factor volatility and the common component in asset-specific volatility have long-term secular trends as well as short-term autocorrelation. Factor volatility has correlation with interest rates and the business cycle.

Original languageEnglish (US)
Pages (from-to)231-255
Number of pages25
JournalJournal of Econometrics
Volume132
Issue number1
DOIs
StatePublished - May 2006

Keywords

  • APT
  • ARCH
  • Factor models
  • Principal components
  • Volatility

ASJC Scopus subject areas

  • Economics and Econometrics

Fingerprint Dive into the research topics of 'The common and specific components of dynamic volatility'. Together they form a unique fingerprint.

Cite this