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Multivariate Realized Stock Market Volatility

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Author Info
Gregory H. Bauer
Keith Vorkink

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Abstract

We present a new matrix-logarithm model of the realized covariance matrix of stock returns. The model uses latent factors which are functions of both lagged volatility and returns. The model has several advantages: it is parsimonious; it does not require imposing parameter restrictions; and, it results in a positive-definite covariance matrix. We apply the model to the covariance matrix of size-sorted stock returns and find that two factors are sufficient to capture most of the dynamics. We also introduce a new method to track an index using our model of the realized volatility covariance matrix.

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File URL: http://www.bankofcanada.ca/en/res/wp/2007/wp07-20.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 07-20.

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Length: 62 pages
Date of creation: 2007
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Handle: RePEc:bca:bocawp:07-20

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Related research
Keywords: Econometric and statistical methods; Financial markets;

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael McAleer & Marcelo Cunha Medeiros, 2006. "Realized volatility: a review," Textos para discussão 531 Publication status: F, Department of Economics PUC-Rio (Brazil). [Downloadable!]
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