Long memory conditional volatility and asset allocation
Harris, Richard D. F.; Nguyen, Anh
Date: 11 January 2013
Article
Journal
International Journal of Forecasting
Publisher
Elsevier
Publisher DOI
Abstract
In this paper, we evaluate the economic benefits that arise from allowing for long memory when forecasting the covariance matrix of returns over both short and long horizons, using the asset allocation framework of Engle and Colacito (2006) In particular, we compare the statistical and economic performances of four multivariate long ...
In this paper, we evaluate the economic benefits that arise from allowing for long memory when forecasting the covariance matrix of returns over both short and long horizons, using the asset allocation framework of Engle and Colacito (2006) In particular, we compare the statistical and economic performances of four multivariate long memory volatility models (the long memory EWMA, long memory EWMA–DCC, FIGARCH-DCC and component GARCH-DCC models) with those of two short memory models (the short memory EWMA and GARCH-DCC models). We report two main findings. First, for longer horizon forecasts, long memory models generally produce forecasts of the covariance matrix that are statistically more accurate and informative, and economically more useful than those produced by short memory models. Second, the two parsimonious long memory EWMA models outperform the other models–both short and long memory–across most forecast horizons. These results apply to both low and high dimensional covariance matrices and both low and high correlation assets, and are robust to the choice of the estimation window.
Finance and Accounting
Faculty of Environment, Science and Economy
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