The Dynamics of Squared Returns Under Contemporaneous Aggregation of GARCH Models

32 Pages Posted: 25 Jun 2014 Last revised: 20 Jan 2017

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute

Date Written: March 18, 2015

Abstract

The paper investigates the properties of a portfolio composed of a large number of assets driven by a strong multivariate GARCH(1,1) process with heterogeneous parameters. The aggregate return is shown to be a weak GARCH process with a (possibly large) number of lags, which reflect the moments of the distribution of the individual persistence parameters. The paper describes a consistent estimator of the aggregate return dynamics, based on nonlinear least squares. The proposed aggregation-corrected estimator (ACE) performs very well and outperforms some competing estimators in forecasting the daily variance of U.S. stocks portfolios at different horizons.

Keywords: Aggregation; Heterogeneity; GARCH model; Volatility

JEL Classification: C13, C21, G17

Suggested Citation

Jondeau, Eric, The Dynamics of Squared Returns Under Contemporaneous Aggregation of GARCH Models (March 18, 2015). Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2458202 or http://dx.doi.org/10.2139/ssrn.2458202

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://www.hec.unil.ch/ejondeau/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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