On the robustness of the principal volatility components

• Autor(a) principal: Trucíos Maza, Carlos César
• Data de Publicação: 2018
• Outros Autores: Hotta, Luiz Koodi, Pereira, Pedro L. Valls
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Institucional do FGV (FGV Repositório Digital)
• Texto Completo: http://hdl.handle.net/10438/20721
• topic: Conditional covariance matrix; Constant volatility; Curse of dimensionality; Jumps; Outlier; Economia; Análise de componentes principais; Mercado financeiro - Modelos econométricos; Investimentos - Análise

In this paper, we analyse the recent principal volatility components analysis procedure. The procedure overcomes several diculties in modelling and forecasting the conditional covariance matrix in large dimensions arising from the curse of dimensionality. We show that outliers have a devastating e↵ect 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.