A Vector Heterogeneous Autoregressive Index Model for Realized Volatility Measures

23 Pages Posted: 23 Jul 2016

See all articles by Gianluca Cubadda

Gianluca Cubadda

University of Rome Tor Vergata - Department of Economics and Finance

Barbara Guardabascio

University of Rome Tor Vergata

Alain Hecq

Maastricht University - Department of Economics

Date Written: July 22, 2016

Abstract

This paper introduces a new modelling for detecting the presence of commonalities in a set of realized volatility measures. In particular, we propose a multivariate generalization of the heterogeneous autoregressive model (HAR) that is endowed with a common index structure. The Vector Heterogeneous Autoregressive Index model has the property to generate a common index that preserves the same temporal cascade structure as in the HAR model, a feature that is not shared by other aggregation methods (e.g., principal components). The parameters of this model can be easily estimated by a proper switching algorithm that increases the Gaussian likelihood at each step. We illustrate our approach with an empirical analysis aiming at combining several realized volatility measures of the same equity index for three different markets.

Keywords: Common volatility, HAR models, index models, combinations of realized volatil¬ities, forecasting.

JEL Classification: C32

Suggested Citation

Cubadda, Gianluca and Guardabascio, Barbara and Hecq, Alain, A Vector Heterogeneous Autoregressive Index Model for Realized Volatility Measures (July 22, 2016). CEIS Working Paper No. 391, Available at SSRN: https://ssrn.com/abstract=2813310 or http://dx.doi.org/10.2139/ssrn.2813310

Gianluca Cubadda (Contact Author)

University of Rome Tor Vergata - Department of Economics and Finance ( email )

Via Columbia n.2
Roma, 00133
Italy

Barbara Guardabascio

University of Rome Tor Vergata ( email )

Via di Tor Vergata
Rome, Lazio 00133
Italy

Alain Hecq

Maastricht University - Department of Economics

P.O. Box 616
Maastricht, 6200 MD
Netherlands

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