Modelling Realized Covariances
This 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.
|Date of creation:||10 Nov 2009|
|Date of revision:|
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