Multivariate Realized Stock Market Volatility

Gregory Bauer and Keith Vorkink

Staff Working Papers from Bank of Canada

Abstract: We present a new matrix-logarithm model of the realized covariance matrix of stock returns. The model uses latent factors which are functions of both lagged volatility and returns. The model has several advantages: it is parsimonious; it does not require imposing parameter restrictions; and, it results in a positive-definite covariance matrix. We apply the model to the covariance matrix of size-sorted stock returns and find that two factors are sufficient to capture most of the dynamics. We also introduce a new method to track an index using our model of the realized volatility covariance matrix.

Keywords: Econometric and statistical methods; Financial markets (search for similar items in EconPapers)
JEL-codes: C32 C53 G14 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2007
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-rmg
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Citations: View citations in EconPapers (19)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:07-20

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