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Modelling Realized Covariances

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Author Info

  • Xin Jin
  • John M Maheu

Abstract

This paper proposes a new dynamic model of realized covariance (RCOV) matrices based on recent work in time-varying Wishart distributions. The specifications can be linked to returns for a joint multivariate model of returns and covariance dynamics that is both easy to estimate and forecast. Realized covariance matrices are constructed for 5 stocks using high-frequency intraday prices based on positive semi-definite realized kernel estimates. We extend the model to capture the strong persistence properties in RCOV. Out-of-sample performance based on statistical and economic metrics show the importance of this. We discuss which features of the model are necessary to provide improvements over a traditional multivariate GARCH model that only uses daily returns.

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File URL: http://www.economics.utoronto.ca/public/workingPapers/tecipa-382.pdf
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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-382.

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Length: 29 pages
Date of creation: 10 Nov 2009
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-382

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Related research

Keywords: eigenvalues; dynamic conditional correlation; predictive likelihoods; MCMC;

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Cited by:
  1. Stahl, Gerhard & Wang, Shaohui & Wendt, Markus, 2011. "Validate Correlation of an ESG: Treasury Yields across," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-476, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  2. Torben G. Andersen & Tim Bollerslev & Peter F. Christoffersen & Francis X. Diebold, 2011. "Financial Risk Measurement for Financial Risk Management," PIER Working Paper Archive 11-037, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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