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Forecasting Multivariate Volatility Using the Varfima Model on Realized Covariance Cholesky Factors

Journal of Economics and Statistics, Vol. 231, No. 1, pp. 134-152, 2011

ECARES working paper 2010‐041

26 Pages Posted: 3 Nov 2010 Last revised: 25 Oct 2011

Roxana Halbleib-Chiriac

University of Konstanz

Valeri Voev

University of Aarhus - CREATES

Date Written: November 2, 2010

Abstract

This paper analyzes the forecast accuracy of the multivariate realized volatility model introduced by Chiriac and Voev (2010), subject to different degrees of model parametrization and economic evaluation criteria. By modelling the Cholesky factors of the covariance matrices, the model generates positive definite, but biased covariance forecasts. In this paper, we provide empirical evidence that parsimonious versions of the model generate the best covariance forecasts in the absence of bias correction. Moreover, we show by means of stochastic dominance tests that any risk averse investor, regardless of the type of utility function or return distribution, would be better-off from using this model than from using some standard approaches.

Keywords: Forecasting, Stochastic dominance, Portfolio optimization, Realized covariance

JEL Classification: C32, C53, G11

Suggested Citation

Halbleib-Chiriac, Roxana and Voev, Valeri, Forecasting Multivariate Volatility Using the Varfima Model on Realized Covariance Cholesky Factors (November 2, 2010). Journal of Economics and Statistics, Vol. 231, No. 1, pp. 134-152, 2011. Available at SSRN: https://ssrn.com/abstract=1707363

Roxana Halbleib-Chiriac (Contact Author)

University of Konstanz ( email )

Universitaetsstr. 10
Box: D 124
78457 Konstanz
Germany

HOME PAGE: http://econometrics.wiwi.uni-konstanz.de/staff/halbleib.htm

Valeri Voev

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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