Simple techniques for likelihood analysis of univariate and multivariate stable distributions: with extensions to multivariate stochastic volatility and dynamic factor models

TL;DR

This paper introduces new numerical inference techniques for univariate and multivariate stable distributions, extending to stochastic volatility and factor models, with practical applications to financial data.

Contribution

It develops novel approximation and Bayesian methods for stable distributions, including spectral measure estimation and extensions to complex models.

Findings

Effective approximation methods for stable distributions.

New techniques for spectral measure estimation.

Successful application to financial data sets.

Abstract

In this paper we consider a variety of procedures for numerical statistical inference in the family of univariate and multivariate stable distributions. In connection with univariate distributions (i) we provide approximations by finite location-scale mixtures and (ii) versions of approximate Bayesian computation (ABC) using the characteristic function and the asymptotic form of the likelihood function. In the context of multivariate stable distributions we propose several ways to perform statistical inference and obtain the spectral measure associated with the distributions, a quantity that has been a major impediment in using them in applied work. We extend the techniques to handle univariate and multivariate stochastic volatility models, static and dynamic factor models with disturbances and factors from general stable distributions, a novel way to model multivariate stochastic volatility through time-varying spectral measures and a novel way to multivariate stable distributions through copulae. The new techniques are applied to artificial as well as real data (ten major currencies, SP100 and individual returns). In connection with ABC special attention is paid to crafting well-performing proposal distributions for MCMC and extensive numerical experiments are conducted to provide critical values of the "closeness" parameter that can be useful for further applied econometric work.