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Realized Covariance Models with Time-varying Parameters and Spillover Effects

Author

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  • Bauwens, Luc

    (Université catholique de Louvain, LIDAM/CORE, Belgium)

  • Otranto, Edoardo

    (Universita di Messina)

Abstract

A realized covariance model specifies a dynamic process for a conditional covariance matrix of daily asset returns as a function of past realized variances and covariances. We propose parsimonious parameterizations enabling a spillover effect in the conditional variance equations, and a specific nonlinear, time-varying, impact of the lagged realized covariance between each asset pair on the corresponding conditional covariance. We introduce these parameterizations in BEKK, DCC and HAR type scalar models. In an application relative to the components of the Dow Jones index, we find that the extended models improve the fit and the out-of-sample forecast performances of their less flexible scalar versions.

Suggested Citation

  • Bauwens, Luc & Otranto, Edoardo, 2023. "Realized Covariance Models with Time-varying Parameters and Spillover Effects," LIDAM Discussion Papers CORE 2023019, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2023019
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    References listed on IDEAS

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    More about this item

    Keywords

    Realized volatility ; spillover effect ; attenuation effect ; time-varying parameters;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • 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
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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