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Fitting vast dimensional time-varying covariance models

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Author Info
Robert Engle ()
Neil Shephard ()
Kevin Shepphard ()

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Abstract

Building models for high dimensional portfolios is important in risk management and asset allocation. Here we propose a novel and fast way of estimating models of time-varying covariances that overcome an undiagnosed incidental parameter problem which has troubled existing methods when applied to hundreds or even thousands of assets. Indeed we can handle the case where the cross-sectional dimension is larger than the time series one. The theory of this new strategy is developed in some detail, allowing formal hypothesis testing to be carried out on these models. Simulations are used to explore the performance of this inference strategy while empirical examples are reported which show the strength of this method. The out of sample hedging performance of various models estimated using this method are compared.

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Publisher Info
Paper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2008fe30.

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Length: 39
Date of creation: 2008
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Handle: RePEc:sbs:wpsefe:2008fe30

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Related research
Keywords: ARCH models; composite likelihood; dynamic conditional correlations; incidental parameters; quasi-likelihood; time-varying covariances.;

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Find related papers by JEL classification:
C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
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    Other versions:
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    Other versions:
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