arXiv 26 Sep 2018 · Econometrics · publishedJournal of Business and Economic Statistics (2019) · 17 citations (OpenAlex)
arXiv:1809.09928 · PDF · DOI · OpenAlex · Extracted main text
Although stochastic volatility and GARCH (generalized autoregressive conditional heteroscedasticity) models have successfully described the volatility dynamics of univariate asset returns, extending them to the multivariate models with dynamic correlations has been difficult due to several major problems. First, there are too many parameters to estimate if available data are only daily returns, which results in unstable estimates. One solution to this problem is to incorporate additional observations based on intraday asset returns, such as realized covariances. Second, since multivariate asset returns are not synchronously traded, we have to use the largest time intervals such that all asset returns are observed in order to compute the realized covariance matrices. However, in this study, we fail to make full use of the available intraday informations when there are less frequently traded assets. Third, it is not straightforward to guarantee that the estimated (and the realized) covariance matrices are positive definite. Our contributions are the following: (1) we obtain the stable parameter estimates for the dynamic correlation models using the realized measures, (2) we make full use of intraday informations by using pairwise realized correlations, (3) the covariance matrices are guaranteed to be positive definite, (4) we avoid the arbitrariness of the ordering of asset returns, (5) we propose the flexible correlation structure model (e.g., such as setting some correlations to be zero if necessary), and (6) the parsimonious specification for the leverage effect is proposed. Our proposed models are applied to the daily returns of nine U.S. stocks with their realized volatilities and pairwise realized correlations and are shown to outperform the existing models with respect to portfolio performances.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Shirota, S., Y. Omori, H. F. Lopes, and H. Piao (2017) Cholesky realized stochastic volatility model | 1.000 | 5 | 3 | 100% |
| 2 | Noureldin, D., N. Shephard, and K. Sheppard (2012) Multivariate high-frequency-based volatility (heavy) models | 0.511 | 2 | 1 | 100% |
| 3 | Andersen, T. G., T. Bollerslev, F. X. Diebold, and H. Ebens (2001) The distribution of realized stock return volatility | 0.405 | 1 | 1 | 100% |
| 4 | Andersen, T. G., T. Bollerslev, F. X. Diebold, and P. Labys (2001) The distribution of realized exchange rate volatility | 0.405 | 1 | 1 | 100% |
| 5 | Barndorff-Nielsen, O. E. and N. Shephard (2002) Econometric analysis of realised volatility and its use in estimating stochastic volatility models | 0.405 | 1 | 1 | 100% |
| 6 | Barndorff-Nielsen, O. E. and N. Shephard (2004) Econometric analysis of realized covariation: High frequency based covariance, regression, and correlation in financial economics | 0.405 | 1 | 1 | 100% |
| 7 | Corsi, F (2009) A simple approximate long-memory model of realized volatility | 0.405 | 1 | 1 | 100% |
| 8 | Dobrev, D. P. and P. J. Szerszen (2010) The information content of high-frequency data for estimating equity return models and forecasting risk | 0.405 | 1 | 1 | 100% |
| 9 | Doornik, J (2006) Ox: Object Oriented Matrix Programming | 0.405 | 1 | 1 | 100% |
| 10 | Engle, R (2002) Dynamic conditional correlation: A simple class of multivariate generalized autoregressive conditional heteroskedasticity models | 0.405 | 1 | 1 | 100% |
Showing the top 10 of 28 scored citations.
arXiv econ.EM papers that cite this one, ranked by how heavily they lean on it.
| Citing paper | Intensity | Mentions | Sections | |
|---|---|---|---|---|
| 1 | Dynamic factor, leverage and realized covariances in multivariate stochastic volatility | 0.737 | 3 | 2 |
| 2 | Efficient variational approximations for state space models | 0.405 | 1 | 1 |