Symitsi, E orcid.org/0000-0001-6371-4156, Symeonidis, L, Kourtis, A et al. (1 more author) (2018) Covariance forecasting in equity markets. Journal of Banking & Finance, 96. pp. 153-168. ISSN 0378-4266
Abstract
We compare the performance of popular covariance forecasting models in the context of a portfolio of major European equity indices. We find that models based on high-frequency data offer a clear advantage in terms of statistical accuracy. They also yield more theoretically consistent predictions from an empirical asset pricing perspective, and, lead to superior out-of-sample portfolio performance. Overall, a parsimonious Vector Heterogeneous Autoregressive (VHAR) model that involves lagged daily, weekly and monthly realised covariances achieves the best performance out of the competing models. A promising new simple hybrid covariance estimator is developed that exploits option-implied information and high-frequency data while adjusting for the volatility riskpremium. Relative model performance does not change during the global financial crisis, or, if a different forecast horizon, or, intraday sampling frequency is employed. Finally, our evidence remains robust when we consider an alternative sample of U.S. stocks.
Metadata
Item Type: | Article |
---|---|
Authors/Creators: |
|
Copyright, Publisher and Additional Information: | © 2018 Published by Elsevier B.V. This is an author produced version of a paper published in Journal of Banking & Finance. Uploaded in accordance with the publisher's self-archiving policy. |
Keywords: | Covariance forecasting; High-frequency data; Implied volatility; Asset allocation; Risk-return trade-off |
Dates: |
|
Institution: | The University of Leeds |
Academic Units: | The University of Leeds > Faculty of Business (Leeds) > Accounting & Finance Division (LUBS) (Leeds) |
Depositing User: | Symplectic Publications |
Date Deposited: | 24 Oct 2018 12:46 |
Last Modified: | 03 Mar 2020 01:40 |
Status: | Published |
Publisher: | Elsevier |
Identification Number: | 10.1016/j.jbankfin.2018.08.013 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:137617 |
Download
Filename: Covariance Forecasting in Equity Markets.pdf
Licence: CC-BY-NC-ND 4.0