Economics at your fingertips  

Multivariate Stochastic Volatility Model with Realized Volatilities and Pairwise Realized Correlations

Yuta Yamauchi and Yasuhiro Omori

Papers from

Abstract: Although stochastic volatility and GARCH (generalized autoregressive conditional heteroscedasticity) models have successfully described the volatility dynamics of univariate asset returns, extending them to the multivariate models with dynamic correlations has been difficult due to several major problems. First, there are too many parameters to estimate if available data are only daily returns, which results in unstable estimates. One solution to this problem is to incorporate additional observations based on intraday asset returns, such as realized covariances. Second, since multivariate asset returns are not synchronously traded, we have to use the largest time intervals such that all asset returns are observed in order to compute the realized covariance matrices. However, in this study, we fail to make full use of the available intraday informations when there are less frequently traded assets. Third, it is not straightforward to guarantee that the estimated (and the realized) covariance matrices are positive definite. Our contributions are the following: (1) we obtain the stable parameter estimates for the dynamic correlation models using the realized measures, (2) we make full use of intraday informations by using pairwise realized correlations, (3) the covariance matrices are guaranteed to be positive definite, (4) we avoid the arbitrariness of the ordering of asset returns, (5) we propose the flexible correlation structure model (e.g., such as setting some correlations to be zero if necessary), and (6) the parsimonious specification for the leverage effect is proposed. Our proposed models are applied to the daily returns of nine U.S. stocks with their realized volatilities and pairwise realized correlations and are shown to outperform the existing models with respect to portfolio performances.

New Economics Papers: this item is included in nep-mst
Date: 2018-09, Revised 2019-03
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) Latest version (application/pdf)

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:

Access Statistics for this paper

More papers in Papers from
Bibliographic data for series maintained by arXiv administrators ().

Page updated 2019-03-14
Handle: RePEc:arx:papers:1809.09928