Dynamic principal component CAW models for high-dimensional realized covariance matrices

Bastian Gribisch and Michael Stollenwerk

Quantitative Finance, 2020, vol. 20, issue 5, 799-821

Abstract: We propose a new dynamic principal component CAW model (DPC-CAW) for time-series of high-dimensional realized covariance matrices of asset returns (up to 100 assets). The model performs a spectral decomposition of the scale matrix of a central Wishart distribution and assumes independent dynamics for the principal components' variances and the eigenvector processes. A three-step estimation procedure makes the model applicable to high-dimensional covariance matrices. We analyze the finite sample properties of the estimation approach and provide an empirical application to realized covariance matrices for 100 assets. The DPC-CAW model has particularly good forecasting properties and outperforms its competitors for realized covariance matrices.

Date: 2020
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DOI: 10.1080/14697688.2019.1701197

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