Estimating stable latent factor models by indirect inference

摘要

Cross-sections of financial returns are characterized by common underlying factors and exhibit fat tails that may be captured by alpha-stable distributions. This paper focuses on estimating factor models with independent latent factors and idiosyncratic noises featuring a multivariate alpha-stable distribution constant over time (static factor models) or a time varying conditional multivariate alpha-stable distribution (GARCH factor models). Although the simulation of such a distribution is straightforward, the estimation of its parameters encounters difficulties. These difficulties are overcome in this paper by implementing the indirect inference estimation method with the multivariate Student's t as the auxiliary distribution. (C) 2018 Elsevier B.V. All rights reserved.