Forecasting The Conditional Covariance Matrix Of A Portfolio Under Long-Run Temporal Dependence
AbstractLong-range persistence in volatility is widely modelled and forecasted in terms of the so-called fractional integrated models. These models are mostly applied in the univariate framework, since the extension to the multivariate context of assets portfolios, while relevant, is not straightforward. We discuss and apply a procedure which is able to forecast the multivariate volatility of a portfolio including assets with long-memory. The main advantage of this model is that it is feasible enough to be applied on large-scale portfolios, solving the problem of dealing with extremely complex likelihood functions which typically arises in this context. An application of this procedure to a portfolio of five daily exchange rate series shows that the out-of-sample forecasts for the multivariate volatility are improved under several loss-functions when the long-range dependence property of the portfolio assets is explicitly accounted for.
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Bibliographic InfoPaper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2003-34.
Length: 30 pages
Date of creation: Oct 2003
Date of revision:
Publication status: Published by Ivie
Exchange Rates; Fractional Integration; Long Memory; MGARCH models; PCA;
Other versions of this item:
- Antonio Rubia & Trino-Manuel ��guez, 2006. "Forecasting the conditional covariance matrix of a portfolio under long-run temporal dependence," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 25(6), pages 439-458.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- F31 - International Economics - - International Finance - - - Foreign Exchange
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