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Combining simple multivariate HAR-like models for portfolio construction

Author

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  • Clements, Adam
  • Vasnev, Andrey L.

Abstract

Forecasts of the covariance matrix of returns is a crucial input into portfolio construction. In recent years multivariate version of the Heterogenous AutoRegressive (HAR) models have been designed to utilise realised measures of the covariance matrix to generate forecasts. This paper shows that combining forecasts from simple HAR-like models provide more coefficients estimates, stable forecasts and lower portfolio turnover. The economic benefits of the combination approach become crucial when transactions costs are taken into account. This combination approach also provides benefits in the context of direct forecasts of the portfolio weights. Economic benefits are observed at both 1-day and 1-week ahead forecast horizons.

Suggested Citation

  • Clements, Adam & Vasnev, Andrey L., 2023. "Combining simple multivariate HAR-like models for portfolio construction," Working Papers BAWP-2023-03, University of Sydney Business School, Discipline of Business Analytics.
    • Handle: RePEc:syb:wpbsba:2123/31836
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    File URL: https://hdl.handle.net/2123/31836
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    More about this item

    Keywords

    Realized volatility; realized covariance; forecast combination; HAR model; multivariate HAR; portfolio;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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