58 Pages Posted: 24 Jan 2014 Last revised: 14 Nov 2016
Date Written: May 10, 2016
An estimator of the ex-post covariation of log-prices under asynchronicity and microstructure noise is proposed. It uses the Cholesky factorization of the covariance matrix in order to exploit the heterogeneity in trading intensities to estimate the different parameters sequentially with as many observations as possible. The estimator is positive semidefinite by construction. We derive asymptotic results and confirm their good finite sample properties by means of a Monte Carlo simulation. In the application we forecast portfolio Value-at-Risk and sector risk exposures for a portfolio of 52 stocks. We find that the dynamic models utilizing the proposed high-frequency estimator provide statistically and economically superior forecasts.
Keywords: Cholesky decomposition, Integrated covariance, Positive semidefinite
JEL Classification: C10, C58
Suggested Citation: Suggested Citation
Boudt, Kris and Laurent, Sébastien and Lunde, Asger and Quaedvlieg, Rogier and Sauri, Orimar, Positive Semidefinite Integrated Covariance Estimation, Factorizations and Asynchronicity (May 10, 2016). Journal of Econometrics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2383871 or http://dx.doi.org/10.2139/ssrn.2383871