Finance & Financial Econometrics: 
Time: 11.30 am
Date: 06th of April 2023
Room 3001

Mariia ARTEMOVA (VU Amsterdam) “An Order-Invariant Score-Driven Dynamic Factor Model”

Abstract :This paper introduces a novel score-driven dynamic factor model designed for filtering cross-sectional co-movements in panels of time series. The model is formulated based on an elliptical distribution, thus allowing the update of the time-varying parameter to be potentially non-linear and robust to outliers. We derive stochastic properties of the time series generated by the model, such as stationarity and ergodicity, and establish the invertibility of the filter. We prove that the identification of the factors and loadings is achieved by incorporating an orthogonality constraint on the loadings which is invariant to the order of the series in the panel. We propose to estimate the static and time-varying parameters jointly using a maximum likelihood estimation on the Stiefel manifolds and establish the asymptotic properties of the constrained estimator. In a series of Monte Carlo experiments, we find evidence of appropriate finite sample properties of the estimator and resulting score filter for the time-varying parameters. We reveal the empirical usefulness of our factor model for constructing indexes of economic activity from a set of macroeconomic and financial variables during the period 1981–2022. Empirical application highlights the importance of the robust update for the time-varying parameters in the presence of a V-shaped recession.

Organizers:
Jean-Michel ZAKOIAN (CREST)

Sponsors:
CREST