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https://hdl.handle.net/2142/87427
Description
Title
Three Essays in Finance
Author(s)
Serbin, Vitaly A.
Issue Date
2001
Doctoral Committee Chair(s)
Lakonishok, Josef
Department of Study
Finance
Discipline
Finance
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Finance
Language
eng
Abstract
Dynamic factor models for forecasting stock return covariance matrix. Factor models are quite popular for forecasting covariances as they reduce the impact of the idiosyncratic return component on forecasts based on the full sample covariance matrix. I examine empirically whether introducing factor dynamics brings any benefits in the context of forecasting the return covariance matrix. When dynamic factor models are used in a global minimum variance problem, the resulting portfolio has marginally lower volatility than when naive historical or static factor models are used. Slightly sharper results in favor of the dynamic factor models are obtained when looking for the minimum tracking error portfolio and when estimating VaR. However, the differences between dynamic and static factor models are not overwhelming.
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