A Large Confirmatory Dynamic Factor Model for Stock Market Returns in Different Time Zones

15:40-17:00, Friday, November 22, 2024

Room 710, Duxing Building

Dr. Wu is now an Associate Professor of Nanjing University. She earned her Ph.D. in 2016 from University of Leuven in Economics. Her research interests include financial econometrics and big data analysis. She has her paper published in Journal of Econometrics，Journal of Futures Markets, and Economic Research Journal.

We propose a confirmatory dynamic factor model for a large number of daily returns across multiple time zones. For each return, the model has a global factor and a continental factor. We propose two estimators of the model: a quasi-maximum likelihood estimator (QML-just-identified), and an improved estimator based on an Expectation Maximization (EM) algorithm (QML-all-res). Our estimators are consistent and asymptotically normal under the large approximate factor model setting. In particular, the asymptotic distributions of QML-all-res are the same as those of the infeasible OLS estimators that treat factors as known and utilize all the restrictions on the parameters of the model. We apply the model to MSCI equity indices of 42 developed and emerging markets, and find that markets are more integrated when the CBOE Volatility Index (VIX) is high.

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