Modeling and forecasting (un)reliable realized covariances for more reliable financial decisions
Tim Bollerslev,
Andrew Patton and
Rogier Quaedvlieg
Journal of Econometrics, 2018, vol. 207, issue 1, 71-91
Abstract:
We propose a new framework for modeling and forecasting common financial risks based on (un)reliable realized covariance measures constructed from high-frequency intraday data. Our new approach explicitly incorporates the effect of measurement errors and time-varying attenuation biases into the covariance forecasts, by allowing the ex-ante predictions to respond more (less) aggressively to changes in the ex-post realized covariance measures when they are more (less) reliable. Applying the new procedures in the construction of minimum variance and minimum tracking error portfolios results in reduced turnover and statistically superior positions compared to existing procedures. Translating these statistical improvements into economic gains, we find that under empirically realistic assumptions a risk-averse investor would be willing to pay up to 170 basis points per year to shift to using the new class of forecasting models.
Keywords: Common risks; Realized covariances; Forecasting; Asset allocation; Portfolio construction (search for similar items in EconPapers)
JEL-codes: C32 C58 G11 G32 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (53)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304407618301180
Full text for ScienceDirect subscribers only
Related works:
Working Paper: Modeling and Forecasting (Un)Reliable Realized Covariances for More Reliable Financial Decisions (2016) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:207:y:2018:i:1:p:71-91
DOI: 10.1016/j.jeconom.2018.05.004
Access Statistics for this article
Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson
More articles in Journal of Econometrics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().