Bayesian panel data analysis for exploring the impact of subprime financial crisis on the US stock market

Ruey S. Tsay, Tomohiro Ando

Research output: Contribution to journalArticle

10 Citations (Scopus)

Abstract

The effects of recent subprime financial crisis on the US stock market are analyzed. To investigate this problem, a Bayesian panel data analysis to identify common factors that explain the movement of stock returns when the dimension is high is developed. For high-dimensional panel data, it is known that previously proposed approaches cannot estimate accurately the variance-covariance matrix. An advantage of the proposed method is that it considers parameter uncertainty in variance-covariance estimation and factor selection. Two new criteria for determining the number of factors in the data are developed and the consistency of the selection criteria as both the number of observations and the cross-section dimension tend to infinity is established. An empirical analysis indicates that the US stock market was subject to 8 common factors before the outbreak of the subprime crisis, but the number of factors reduced substantially after the outbreak. In particular, a small number of common factors govern the fluctuations of the stock market after the collapse of Lehman Brothers. In other words, empirical evidence that the structure of US stock market has changed drastically after the subprime crisis is obtained. It is also shown that the factor models selected by the proposed criteria work well in out-of-sample forecasting of asset returns.

Original languageEnglish
Pages (from-to)3345-3365
Number of pages21
JournalComputational Statistics and Data Analysis
Volume56
Issue number11
DOIs
Publication statusPublished - 2012 Nov

Fingerprint

Financial Crisis
Panel Data
Stock Market
Common factor
Data analysis
Covariance Estimation
Variance-covariance Matrix
Stock Returns
Variance Estimation
Factor Models
Empirical Analysis
Parameter Uncertainty
High-dimensional Data
Covariance matrix
Forecasting
Cross section
Infinity
Tend
Fluctuations
Financial markets

Keywords

  • Markov chain Monte Carlo
  • Model selection
  • Panel data

ASJC Scopus subject areas

  • Computational Mathematics
  • Computational Theory and Mathematics
  • Statistics and Probability
  • Applied Mathematics

Cite this

Bayesian panel data analysis for exploring the impact of subprime financial crisis on the US stock market. / Tsay, Ruey S.; Ando, Tomohiro.

In: Computational Statistics and Data Analysis, Vol. 56, No. 11, 11.2012, p. 3345-3365.

Research output: Contribution to journalArticle

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