Modeling Realized Covariances and Returns

X. Jin, J. M. Maheu
2012 Journal of Financial Econometrics  
This paper proposes new dynamic component models of returns and realized covariance (RCOV) matrices based on time-varying Wishart distributions. Bayesian estimation and model comparison is conducted with a range of multivariate GARCH models and existing RCOV models from the literature. The main method of model comparison consists of a term-structure of density forecasts of returns for multiple forecast horizons. The new joint return-RCOV models provide superior density forecasts for returns
more » ... forecast horizons of 1 day to 3 months ahead as well as improved point forecasts for realized covariances. Global minimum variance portfolio selection is improved for forecast horizons up to 3 weeks out.
doi:10.1093/jjfinec/nbs022 fatcat:pzfqvyfz3vaj3k2of44qlss6c4