Multistep Predictions from Multivariate ARMA-GARCH: Models and their Value for Portfolio Management
In this paper we derive the closed form solution for multistep predictions of the conditional means and their covariances from multivariate ARMA-GARCH models. These are useful e.g. in mean variance portfolio analysis when the rebalancing frequency is lower than the data frequency. In this situation the conditional mean and covariance matrix of the sum of the higher frequency returns until the next rebalancing period is required as input in the mean variance portfolio problem. The closed form solution for this quantity is derived as well. We assess the empirical value of the result by evaluating and comparing the performance of quarterly and monthly rebalanced portfolios using monthly MSCI index data across a large set of ARMA-GARCH models. The results forcefully demonstrate the substantial value of multistep predictions for portfolio management.
|Date of creation:||Nov 2002|
|Date of revision:|
|Contact details of provider:|| Postal: Schanzeneckstr. 1, PF 8573, CH-3001 Bern|
Phone: 0041 31 631 45 06
Fax: 41 31 631 37 83
Web page: http://www.vwi.unibe.ch/content/publikationen/index_eng.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Foort HAMELINK, 2000. "Optimal International Diversification: Theory and Practice from a Swiss Investor’s Perspective," FAME Research Paper Series rp21, International Center for Financial Asset Management and Engineering.
- Jeff Fleming, 2001. "The Economic Value of Volatility Timing," Journal of Finance, American Finance Association, vol. 56(1), pages 329-352, 02.
- Menelaos Karanasos, . "Prediction in ARMA models with GARCH in Mean Effects," Discussion Papers 99/11, Department of Economics, University of York.
- Baillie, R.T. & Bollerslev, R.T., 1990.
"Prediction In Dynamic Models With Time Dependent Conditional Variances,"
8815, Michigan State - Econometrics and Economic Theory.
- Baillie, Richard T. & Bollerslev, Tim, 1992. "Prediction in dynamic models with time-dependent conditional variances," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 91-113.
- Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
- Bollerslev, Tim, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
Journal of Econometrics,
Elsevier, vol. 31(3), pages 307-327, April.
- Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- repec:cup:etheor:v:11:y:1995:i:1:p:122-50 is not listed on IDEAS
- Nilsson, Birger, 2002. "International Asset Pricing and the Benefits from World Market Diversification," Working Papers 2002:1, Lund University, Department of Economics.
- Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
- Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
- Andrew Harvey & Esther Ruiz & Neil Shephard, 1994. "Multivariate Stochastic Variance Models," Review of Economic Studies, Oxford University Press, vol. 61(2), pages 247-264.
When requesting a correction, please mention this item's handle: RePEc:ube:dpvwib:dp0212. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Silvia Glusstein-Gerber)
If references are entirely missing, you can add them using this form.