Modelling Realized Covariances
AbstractThis 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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Bibliographic InfoPaper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-382.
Length: 29 pages
Date of creation: 10 Nov 2009
Date of revision:
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eigenvalues; dynamic conditional correlation; predictive likelihoods; MCMC;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- 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
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-11-14 (All new papers)
- NEP-ECM-2009-11-14 (Econometrics)
- NEP-ETS-2009-11-14 (Econometric Time Series)
- NEP-FOR-2009-11-14 (Forecasting)
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- Torben G. Andersen & Tim Bollerslev & Peter F. Christoffersen & Francis X. Diebold, 2012.
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NBER Working Papers
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- Torben G. Andersen & Tim Bollerslev & Peter F. Christoffersen & Francis X. Diebold, 2011. "Financial Risk Measurement for Financial Risk Management," CREATES Research Papers 2011-37, School of Economics and Management, University of Aarhus.
- Golosnoy, Vasyl & Gribisch, Bastian & Liesenfeld, Roman, 2012. "The conditional autoregressive Wishart model for multivariate stock market volatility," Journal of Econometrics, Elsevier, vol. 167(1), pages 211-223.
- Stahl, Gerhard & Wang, Shaohui & Wendt, Markus, 2011. "Validate Correlation of an ESG: Treasury Yields across," Diskussionspapiere der Wirtschaftswissenschaftlichen FakultÃ¤t der Leibniz UniversitÃ¤t Hannover dp-476, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
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