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Positive semidefinite integrated covariance estimation, factorizations and asynchronicity

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  • Boudt, Kris
  • Laurent, Sébastien
  • Lunde, Asger
  • Quaedvlieg, Rogier
  • Sauri, Orimar

Abstract

An estimator of the ex-post covariation of log-prices under asynchronicity and microstructure noise is proposed. It uses the Cholesky factorization of the covariance matrix in order to exploit the heterogeneity in trading intensities to estimate the different parameters sequentially with as many observations as possible. The estimator is positive semidefinite by construction. We derive asymptotic results and confirm their good finite sample properties by means of a Monte Carlo simulation. In the application we forecast portfolio Value-at-Risk and sector risk exposures for a portfolio of 52 stocks. We find that the dynamic models utilizing the proposed high-frequency estimator provide statistically and economically superior forecasts.

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  • Boudt, Kris & Laurent, Sébastien & Lunde, Asger & Quaedvlieg, Rogier & Sauri, Orimar, 2017. "Positive semidefinite integrated covariance estimation, factorizations and asynchronicity," Journal of Econometrics, Elsevier, vol. 196(2), pages 347-367.
  • Handle: RePEc:eee:econom:v:196:y:2017:i:2:p:347-367
    DOI: 10.1016/j.jeconom.2016.09.016
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    References listed on IDEAS

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    Cited by:

    1. BAUWENS, Luc & BRAIONE, Manuela & STORTI, Giuseppe, 2016. "Multiplicative Conditional Correlation Models for Realized Covariance Matrices," CORE Discussion Papers 2016041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Opschoor, Anne & van Dijk, Dick & van der Wel, Michel, 2014. "Predicting volatility and correlations with Financial Conditions Indexes," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 435-447.
    3. repec:eee:econom:v:204:y:2018:i:2:p:223-247 is not listed on IDEAS
    4. Darolles, Serges & Francq, Christian & Laurent, Sébastien, 2018. "Asymptotics of Cholesky GARCH models and time-varying conditional betas," MPRA Paper 83988, University Library of Munich, Germany.

    More about this item

    Keywords

    Cholesky decomposition; Integrated covariance; Non-synchronous trading; Positive semidefinite; Realized covariance;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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