Template-type: ReDIF-Paper 1.0
Author-Name: Matteo Bonato
Author-Name-First: Matteo
Author-Name-Last: Bonato
Author-Name: Massimiliano Caporin
Author-Name-First: Massimiliano
Author-Name-Last: Caporin
Author-Person: pca441
Author-Name: Angelo Ranaldo
Author-Name-First: Angelo
Author-Name-Last: Ranaldo
Author-Person: pra161
Title: Forecasting realized (co)variances with a block structure Wishart autoregressive model
Abstract: In modelling and forecasting volatility, two main trade-offs emerge: mathematical tractability versus economic interpretation and accuracy versus speed. The authors attempt to reconcile, at least partially, both trade-offs. The former trade-off is crucial for many financial applications, including portfolio and risk management. The speed/accuracy trade-off is becoming more and more relevant in an environment of large portfolios, prolonged periods of high volatility (as in the current financial crisis), and the burgeoning phenomenon of algorithmic trading in which computer-based trading rules are automatically implemented. The increased availability of high-frequency data provides new tools for forecasting variances and covariances between assets. However, there is scant literature on forecasting more than one realised volatility. Following Gourieroux, Jasiak and Sufana (Journal of Econometrics, forthcoming), the authors propose a methodology to model and forecast realised covariances without any restriction on the parameters while maintaining economic interpretability. An empirical application based on variance forecasting and risk evaluation of a portfolio of two US treasury bills and two exchange rates is presented. The authors compare their model with several alternative specifications proposed in the literature. Empirical findings suggest that the model can be efficiently used in large portfolios.
Length: 40 pages
Creation-Date: 2009
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2009/working_paper_2009_03
File-Format: text/html
Number: 2009-03
Classification-JEL: C13, C16, C22, C51, C53
Keywords: Wishart process, realized volatility, Granger causality, volatility spillover, Value-at-Risk
Handle: RePEc:snb:snbwpa:2009-03