Department of Economics and Business Economics

Positive Semidefinite Integrated Covariance Estimation, Factorizations and Asynchronicity

Research output: ResearchWorking paper

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  • rp14_05

    Submitted manuscript, 711 KB, PDF-document

  • Kris Boudt
    Kris BoudtVrije Universiteit Brussel, Belgium and VU University AmsterdamNetherlands
  • Sébastien Laurent
    Sébastien LaurentAix-Marseille UniversityFrance
  • Asger Lunde
  • Rogier Quaedvlieg
    Rogier QuaedvliegMaastricht UniversityNetherlands
An estimator of the ex-post covariation of log-prices under asynchronicity and microstructure noise is proposed. It uses the Cholesky factorization on the correlation matrix in order to exploit the heterogeneity in trading intensity to estimate the different parameters sequentially with as many observations as possible. The estimator is guaranteed positive semidefinite. Monte Carlo simulations confirm good finite sample properties. In the application we forecast portfolio Value-at-Risk and sector risk exposures for a portfolio of 52 stocks. We find that forecasts obtained from dynamic models utilizing the proposed high-frequency estimator provide statistically and economically superior forecasts to models using daily returns.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages32
StatePublished - 25 Feb 2014
SeriesCREATES Research Papers
Number2014-05

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