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Multivariate Realized Stock Market Volatility

Author Info

Listed author(s):
  • Gregory H. Bauer
  • Keith Vorkink

Abstract

We present a new matrix-logarithm model of the realized covariance matrix of stock returns. The model uses latent factors which are functions of both lagged volatility and returns. The model has several advantages: it is parsimonious; it does not require imposing parameter restrictions; and, it results in a positive-definite covariance matrix. We apply the model to the covariance matrix of size-sorted stock returns and find that two factors are sufficient to capture most of the dynamics. We also introduce a new method to track an index using our model of the realized volatility covariance matrix.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/03/wp07-20.pdf
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Paper provided by Bank of Canada in its series Staff Working Papers with number 07-20.

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Length: 62 pages
Date of creation: 2007
Handle: RePEc:bca:bocawp:07-20
Contact details of provider: Postal:
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Phone: 613 782-8845
Fax: 613 782-8874
Web page: http://www.bank-banque-canada.ca/

Keywords: Econometric and statistical methods; Financial markets;

Find related papers by JEL classification:

  • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
  • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
  • 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

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