45 Pages Posted: 9 Oct 2014 Last revised: 1 Nov 2015
Date Written: October 13, 2015
We introduce LASSO -- type regularization for large dimensional realized covariance estimators of log -- prices. The procedure consists of shrinking the off -- diagonal entries of the inverse realized covariance matrix towards zero. This technique produces covariance estimators that are positive definite and with a sparse inverse. We name the estimator realized network, since estimating a sparse inverse realized covariance matrix is equivalent to detecting the partial correlation network structure of the daily log-prices. The large sample consistency and selection properties of the estimator are established. An application to a panel of US bluechips shows the advantages of the estimator for out -- of -- sample GMV asset allocation.
Keywords: Networks, Realized Covariance, Lasso
JEL Classification: C13, C33, C52, C58
Suggested Citation: Suggested Citation
By Andrew Ang