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    Rights statement: This is the author’s version of a work that was accepted for publication in Journal of Econometrics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Econometrics, 222, 1, 2021 DOI: 10.1016/j.jeconom.2020.07.004

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    Embargo ends: 8/08/22

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Time-Varying General Dynamic Factor Models and the Measurement of Financial Connectedness

Research output: Contribution to journalJournal articlepeer-review

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<mark>Journal publication date</mark>31/05/2021
<mark>Journal</mark>Journal of Econometrics
Issue number1
Volume222
Number of pages20
Pages (from-to)324-343
Publication StatusPublished
Early online date8/08/20
<mark>Original language</mark>English

Abstract

We propose a new time-varying Generalized Dynamic Factor Model for high-dimensional, locally stationary time series. Estimation is based on dynamic principal component analysis jointly with singular VAR estimation, and extends to the locally stationary case the one-sided estimation method proposed by Forni et al. (2017) for stationary data. We prove consistency of our estimators of time-varying impulse response functions as both the sample size and the dimension of the time series grow to infinity. This approach is used in an empirical application in order to construct a time-varying measure of financial connectedness for a large panel of adjusted intra-day log ranges of stocks. We show that large increases in long-run connectedness are associated with the main financial turmoils. Moreover, we provide evidence of a significant heterogeneity in the dynamic responses to common shocks in time and over different scales, as well as across industrial sectors.

Bibliographic note

This is the author’s version of a work that was accepted for publication in Journal of Econometrics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Econometrics, 222, 1, 2021 DOI: 10.1016/j.jeconom.2020.07.004