Working Paper

Multivariate return decomposition: theory and implications

Abstract: In this paper, we propose a model based on multivariate decomposition of multiplicative?absolute values and signs?components of several returns. In the m-variate case, the marginals for the m absolute values and the binary marginals for the m directions are linked through a 2m-dimensional copula. The approach is detailed in the case of a bivariate decomposition. We outline the construction of the likelihood function and the computation of different conditional measures. The finite-sample properties of the maximum likelihood estimator are assessed by simulation. An application to predicting bond returns illustrates the usefulness of the proposed method.

Keywords: multivariate decomposition; multiplicative components; volatility and direction models; copula; dependence;

JEL Classification: C13; C32; C51; G12;

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Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2015-08-01

Number: 2015-7

Pages: 31 pages