Modeling and Forecasting Realized Covariance Matrices with Accounting for Leverage
Econometric Reviews, Forthcoming
50 Pages Posted: 11 Feb 2015
Date Written: February 10, 2015
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: Suggested Citation