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Challenging golden standards in EWMA smoothing parameter calibration based on realized covariance measures

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  • Hartkopf, Jan Patrick
  • Reh, Laura

Abstract

We investigate the calibration of the smoothing parameter in an exponentially weighted moving average (EWMA) for realized covariance matrices. Whereas the popular risk metrics calibration of JPMorgan (Reuters, 1996) has been proven to be successful in applications based on daily or monthly return data, we demonstrate that the golden standard degree of smoothing is not transferable to applications with realized (co)variances which convey a substantially more informative signal. Moreover, we propose a simple data-driven heuristic for the calibration of λ and demonstrate in our empirical application its superiority over ad-hoc choices for λ in multivariate settings with regard to predictive accuracy.

Suggested Citation

  • Hartkopf, Jan Patrick & Reh, Laura, 2023. "Challenging golden standards in EWMA smoothing parameter calibration based on realized covariance measures," Finance Research Letters, Elsevier, vol. 56(C).
    • Handle: RePEc:eee:finlet:v:56:y:2023:i:c:s1544612323005019
    DOI: 10.1016/j.frl.2023.104129
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    More about this item

    Keywords

    Exponentially weighted moving average; EWMA; RiskMetrics; Realized covariance; Prediction; Matrix-F distribution;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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