Modeling and Forecasting Realized Covariance Matrices with Accounting for Leverage

Econometric Reviews, Forthcoming

50 Pages Posted: 11 Feb 2015

Date Written: February 10, 2015

Abstract

The existing dynamic models for realized covariance matrices do not account for an asymmetry with respect to price directions. We modify the recently proposed conditional autoregressive Wishart (CAW) model to allow for the leverage effect. In the conditional threshold autoregressive Wishart (CTAW) model and its variations the parameters governing each asset's volatility and covolatility dynamics are subject to switches that depend on signs of previous asset returns or previous market returns. We evaluate the predictive ability of the CTAW model and its restricted and extended specifications from both statistical and economic points of view. We find strong evidence that many CTAW specifications have a better in-sample fit and tend to have a better out-of-sample predictive ability than the original CAW model and its modifications.

Keywords: volatility, realized covariance matrix, leverage, conditional Wishart

JEL Classification: C32, C51, C58

Suggested Citation

Anatolyev, Stanislav and Kobotaev, Nikita, Modeling and Forecasting Realized Covariance Matrices with Accounting for Leverage (February 10, 2015). Econometric Reviews, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2562938

Stanislav Anatolyev (Contact Author)

New Economic School ( email )

Skolkovskoe shosse, 45
Moscow, 121353
Russia

CERGE-EI ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

Nikita Kobotaev

Independent ( email )

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