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Federal Reserve Bank of Atlanta
FRB Atlanta Working Paper
Multivariate return decomposition: theory and implications
Stanislav Anatolyev
Nikolay Gospodinov

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.

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Stanislav Anatolyev & Nikolay Gospodinov, Multivariate return decomposition: theory and implications, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper 2015-7, 01 Aug 2015.
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Keywords: multivariate decomposition; multiplicative components; volatility and direction models; copula; dependence
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