EconPapers    
Economics at your fingertips  
 

Covariance forecasting in equity markets

Efthymia Symitsi, Lazaros Symeonidis (), Apostolos Kourtis and Raphael Markellos

Journal of Banking & Finance, 2018, vol. 96, issue C, 153-168

Abstract: We compare the performance of popular covariance forecasting models in the context of a portfolio of major European equity indices. We find that models based on high-frequency data offer a clear advantage in terms of statistical accuracy. They also yield more theoretically consistent predictions from an empirical asset pricing perspective, and, lead to superior out-of-sample portfolio performance. Overall, a parsimonious Vector Heterogeneous Autoregressive (VHAR) model that involves lagged daily, weekly and monthly realised covariances achieves the best performance out of the competing models. A promising new simple hybrid covariance estimator is developed that exploits option-implied information and high-frequency data while adjusting for the volatility riskpremium. Relative model performance does not change during the global financial crisis, or, if a different forecast horizon, or, intraday sampling frequency is employed. Finally, our evidence remains robust when we consider an alternative sample of U.S. stocks.

Keywords: Covariance forecasting; High-frequency data; Implied volatility; Asset allocation; Risk-return trade-off (search for similar items in EconPapers)
JEL-codes: C50 C58 G11 G12 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S037842661830181X
Full text for ScienceDirect subscribers only

Related works:
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:jbfina:v:96:y:2018:i:c:p:153-168

Access Statistics for this article

Journal of Banking & Finance is currently edited by Ike Mathur

More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-03-31
Handle: RePEc:eee:jbfina:v:96:y:2018:i:c:p:153-168