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Economic Value of Realized Covariance Forecasts: The European Case

Listed author(s):
  • Dimitrios Vortelinos
  • Dimitrios Thomakos

This paper investigates the economic value of dierent non-parametric realized volatility estimates in Efficient Frontier, Global Minimum Variance,Capital Market Line and Capital Market Line with only positive weights portfolio types. The dataset concerns the CAC40 index, the DAX index and the General Index (GD) of the Athens Stock Exchange. We use the unrestricted realized volatility estimator, the realized optimally sampled volatility estimator and their bias-corrections against the benchmark of the daily squared returns. The value of switching from daily to intraday returns in estimating the covariance matrix is substantial. The type of realized volatility estimator used is also important. This is proven true according to the portfolio statistic measures (mean, standard deviation, Sharp Ratio and Cumulative Return), the basis points that a risk averse investor is willing to pay per year in order to gain from the realized covariance estimates instead of the daily squared returns, the proportion of times that the average portfolio return of the realized covariance forecasts is higher than the benchmark and the proportion of combinations of portfolio parameters for which the above proportion measure is higher than or equals to the 50% of the total combinations of portfolio parameters used.

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Paper provided by University of Peloponnese, Department of Economics in its series Working Papers with number 00042.

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Length: 35 pages
Date of creation: 2009
Handle: RePEc:uop:wpaper:00042
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