Combining simple multivariate HAR-like models for portfolio construction

Adam Clements and Andrey Vasnev

No BAWP-2023-03, Working Papers from University of Sydney Business School, Discipline of Business Analytics

Abstract: Forecasts of the covariance matrix of returns is a crucial input into portfolio construction. In recent years multivariate version of the Heterogenous AutoRegressive (HAR) models have been designed to utilise realised measures of the covariance matrix to generate forecasts. This paper shows that combining forecasts from simple HAR-like models provide more coefficients estimates, stable forecasts and lower portfolio turnover. The economic benefits of the combination approach become crucial when transactions costs are taken into account. This combination approach also provides benefits in the context of direct forecasts of the portfolio weights. Economic benefits are observed at both 1-day and 1-week ahead forecast horizons.

Keywords: Realized volatility; realized covariance; forecast combination; HAR model; multivariate HAR; portfolio (search for similar items in EconPapers)
JEL-codes: C53 C58 (search for similar items in EconPapers)
Date: 2023-11-03
New Economics Papers: this item is included in nep-mac and nep-rmg
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