The dynamics of squared returns under contemporaneous aggregation of GARCH models

Eric Jondeau

Journal of Empirical Finance, 2015, vol. 32, issue C, 80-93

Abstract: The paper investigates the properties of a portfolio composed of a large number of assets driven by a strong multivariate GARCH(1,1) process with heterogeneous parameters. The aggregate return is shown to be a weak GARCH process with a (possibly large) number of lags, which reflects the moments of the distribution of the individual persistence parameters. The paper describes a consistent estimator of the aggregate return dynamics, based on nonlinear least squares. The proposed aggregation-corrected estimator (ACE) performs very well and outperforms some competing estimators in forecasting the daily variance of U.S. stocks portfolios at different horizons.

Keywords: Aggregation; Heterogeneity; GARCH model; Volatility (search for similar items in EconPapers)
JEL-codes: C13 C21 G17 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:32:y:2015:i:c:p:80-93

DOI: 10.1016/j.jempfin.2015.03.002

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