Forecast of realized covariance matrix based on asymptotic distribution of the LU decomposition with an application for balancing minimum variance portfolio

Hee Soo Kim, Dong Wan Shin

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

We derive the asymptotic distribution for the LU decomposition, that is, the Cholesky decomposition, of realized covariance matrix. Distributional properties are combined with an existing generalized heterogeneous autoregressive (GHAR) method for forecasting realized covariance matrix, which will be referred to as a generalized HARQ (GHARQ) method. An out-of-sample forecast comparison of a real data set shows that the proposed GHARQ method outperforms other existing methods in terms of optimizing the variances of portfolios.

Original languageEnglish
Pages (from-to)661-668
Number of pages8
JournalApplied Economics Letters
Volume26
Issue number8
DOIs
StatePublished - 4 May 2019

Keywords

  • Cholesky decomposition
  • GHAR
  • LU decomposition
  • minimum variance portfolio
  • portfolio optimization
  • realized covariance

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