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The dynamic factor model: an application to stock market indexes

Thelma Sáfadi, Airlane P. Alencar, Pedro A. Morettin

Abstract


The fallout from the collapse of the US mortgage market and the reversal of the housing boom in several important countries has turned out to be more profound and persistent than expected in 2007 and beginning of 2008. To examine the association among the main world stock markets from 2008 onwards, we consider the dynamic factor model in a Bayesian framework. The series considered were daily data for S and P500 ( US), Shanghai Comp Index (China), FTSE100 (UK), CAC40 (France), DAX ( Germany), S and P/TSX (Canada), Bovespa (Brazil), Merval (Argentina), Nikkei 225 (Japan) during the period from January 4th, 2008 to May 10th, 2010. We observe that there is a main factor explaining the financial
crisis which was felt in all stock market indexes. The second factor is composed only by China and Japan, the Asian countries, and the third factor is associated with European countries, namely Britain, France and Germany.

Keywords


Stock market index, data augmentation, factor model, Bayesian analysis, Gibbs sampler.

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