Modeling Tick-by-Tick Realized Correlations
University of St. Gallen Economics Discussion Paper No. 2008-05
29 Pages Posted: 18 Feb 2008 Last revised: 27 Apr 2008
Date Written: January 2008
We propose a tree-structured heterogeneous autoregressive (tree-HAR) process as a simple and parsimonious model for the estimation and prediction of tick-by-tick realized correlations. The model can account for different time and other relevant predictors' dependent regime shifts in the conditional mean dynamics of the realized correlation series. Testing the model on S&P 500 and 30-year treasury bond futures realized correlations, we provide empirical evidence that the tree-HAR model reaches a good compromise between simplicity and flexibility, and yields accurate single- and multi-step out-of-sample forecasts. Such forecasts are also better then those obtained from other standard approaches.
Keywords: High frequency data, Realized correlation, Stock-bond correlation, Tree-structured models, HAR, Regimes
JEL Classification: C13, C22, C51, C53
Suggested Citation: Suggested Citation