Title: Factor modeling for volatility
Authors: Yi Ding - The University of Macau (China) [presenting]
Robert Engle - NYU Stern (United States)
Yingying Li - Hong Kong University of Science and Technology (Hong Kong)
Xinghua Zheng - HKUST (China)
Abstract: Under a high-frequency and high-dimensional setup, we establish a framework to estimate the factor structure in idiosyncratic and stock volatility. We show that the factor structure in idiosyncratic volatility can be consistently estimated by conducting principal component analysis on the idiosyncratic realized volatilities. Empirically, we confirm and identify the factor structure in idiosyncratic volatilities of S\&P~500 Index constituents. Furthermore, motivated by strong empirical evidence, a single-factor volatility model is proposed. Empirical examination of the model reveals that the simple model well explains the co-movement feature of stock volatilities, and leads to substantial gain in forecasting.