Quantile Co-Movement in Financial Markets: A Panel Quantile Model With Unobserved Heterogeneity

Abstract

This article introduces a new procedure for analyzing the quantile co-movement of a large number of financial time series based on a large-scale panel data model with factor structures. The proposed method attempts to capture the unobservable heterogeneity of each of the financial time series based on sensitivity to explanatory variables and to the unobservable factor structure. In our model, the dimension of the common factor structure varies across quantiles, and the explanatory variables is allowed to depend on the factor structure. The proposed method allows for both cross-sectional and serial dependence, and heteroscedasticity, which are common in financial markets. We propose new esti..