Forecasting High-Dimensional Realized Volatility Matrices Using A Factor Model
Applications
2015-04-15 v1 Methodology
Abstract
Modeling and forecasting covariance matrices of asset returns play a crucial role in finance. The availability of high frequency intraday data enables the modeling of the realized covariance matrix directly. However, most models in the literature suffer from the curse of dimensionality. To solve the problem, we propose a factor model with a diagonal CAW model for the factor realized covariance matrices. Asymptotic theory is derived for the estimated parameters. In an extensive empirical analysis, we find that the number of parameters can be reduced significantly. Furthermore, the proposed model maintains a comparable performance with a benchmark vector autoregressive model.
Cite
@article{arxiv.1504.03454,
title = {Forecasting High-Dimensional Realized Volatility Matrices Using A Factor Model},
author = {Keren Shen and Jianfeng Yao and Wai Keung Li},
journal= {arXiv preprint arXiv:1504.03454},
year = {2015}
}