High Dimensional Covariance Forecasting for Short Intra-Day Horizons

Quantitative Finance, Vol. 10, No. 10, pp. 1173-1185, 2010

22 Pages Posted: 10 May 2009 Last revised: 29 Oct 2010

See all articles by Roel C. A. Oomen

Roel C. A. Oomen

Deutsche Bank AG (London); London School of Economics & Political Science (LSE) - Department of Statistics

Date Written: May 1, 2009

Abstract

Asset return covariances at intra-day horizons are known to be biased towards zero due to market microstructure effects. Thus, traders who simply scale their daily covariance forecast to match their trading horizon, are likely to over-estimate the actual experienced asset dependence. In this paper we discuss some of the key challenges encountered when forecasting high dimensional covariance matrices for short intra-day horizons. Based on a novel evaluation methodology, and extensive empirical analysis, we make specific recommendations regarding model design and data sampling.

Suggested Citation

Oomen, Roel C.A., High Dimensional Covariance Forecasting for Short Intra-Day Horizons (May 1, 2009). Quantitative Finance, Vol. 10, No. 10, pp. 1173-1185, 2010. Available at SSRN: https://ssrn.com/abstract=1401962

Roel C.A. Oomen (Contact Author)

Deutsche Bank AG (London) ( email )

Winchester House
1 Great Winchester Street
London, EC2N 2DB
United Kingdom

London School of Economics & Political Science (LSE) - Department of Statistics ( email )

Houghton Street
London, England WC2A 2AE
United Kingdom

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