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Combining simple multivariate HAR-like models for portfolio construction

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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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    References listed on IDEAS

    as
    1. Golosnoy, Vasyl & Gribisch, Bastian, 2022. "Modeling and forecasting realized portfolio weights," Journal of Banking & Finance, Elsevier, vol. 138(C).
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    6. Golosnoy, Vasyl & Gribisch, Bastian & Seifert, Miriam Isabel, 2019. "Exponential smoothing of realized portfolio weights," Journal of Empirical Finance, Elsevier, vol. 53(C), pages 222-237.
    7. Bollerslev, Tim & Patton, Andrew J. & Quaedvlieg, Rogier, 2016. "Exploiting the errors: A simple approach for improved volatility forecasting," Journal of Econometrics, Elsevier, vol. 192(1), pages 1-18.
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    9. Bollerslev, Tim & Patton, Andrew J. & Quaedvlieg, Rogier, 2018. "Modeling and forecasting (un)reliable realized covariances for more reliable financial decisions," Journal of Econometrics, Elsevier, vol. 207(1), pages 71-91.
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    Full references (including those not matched with items on IDEAS)

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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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