Modelling and Forecasting Multivariate Realized Volatility
AbstractThis paper proposes a methodology for modelling time series of realized covariance matrices in order to forecast multivariate risks. The approach allows for flexible dynamic dependence patterns and guarantees positive definiteness of the resulting forecasts without imposing parameter restrictions. We provide an empirical application of the model, in which we show by means of stochastic dominance tests that the returns from an optimal portfolio based on the model’s forecasts second-order dominate returns of portfolios optimized on the basis of traditional MGARCH models. This result implies that any risk-averse investor, regardless of the type of utility function, would be better-off using our model.
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Bibliographic InfoPaper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2008-39.
Date of creation: 02 Sep 2008
Date of revision:
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Web page: http://www.econ.au.dk/afn/
Forecasting; Fractional integration; Stochastic dominance; Portfolio optimization; Realized covariance;
Other versions of this item:
- Roxana Chiriac & Valeri Voev, 2011. "Modelling and forecasting multivariate realized volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(6), pages 922-947, 09.
- Roxana Chiriac & Valeri Voev, 2008. "Modelling and Forecasting Multivariate Realized Volatility," CoFE Discussion Paper 08-06, Center of Finance and Econometrics, University of Konstanz.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-05 (All new papers)
- NEP-ECM-2008-09-05 (Econometrics)
- NEP-ETS-2008-09-05 (Econometric Time Series)
- NEP-FMK-2008-09-05 (Financial Markets)
- NEP-FOR-2008-09-05 (Forecasting)
- NEP-ORE-2008-09-05 (Operations Research)
- NEP-UPT-2008-09-05 (Utility Models & Prospect Theory)
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