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

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  • Hee-Soo Kim
  • Dong Wan Shin

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.

Suggested Citation

  • Hee-Soo Kim & Dong Wan Shin, 2019. "Forecast of realized covariance matrix based on asymptotic distribution of the LU decomposition with an application for balancing minimum variance portfolio," Applied Economics Letters, Taylor & Francis Journals, vol. 26(8), pages 661-668, May.
    • Handle: RePEc:taf:apeclt:v:26:y:2019:i:8:p:661-668
    DOI: 10.1080/13504851.2018.1489108
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