A Vector Heterogeneous Autoregressive Index Model for Realized Volatily Measures

Cubadda GianlucaGuardabascio BarbaraHecq Alain
CEIS Research Paper
This paper introduces a new modelling for detecting the presence of commonalities in a set of realized volatility measures. In particular, we propose a multivariate generalization of the heterogeneous autoregressive model (HAR) that is endowed with a common index structure. The Vector Heterogeneous Autoregressive Index model has the property to generate a common index that preserves the same temporal cascade structure as in the HAR model, a feature that is not shared by other aggregation methods (e.g., principal components). The parameters of this model can be easily estimated by a proper switching algorithm that increases the Gaussian likelihood at each step. We illustrate our approach with an empirical analysis aiming at combining several realized volatility measures of the same equity index for three di?erent markets.

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Number: 391
Keywords: Common volatility, HAR models, index models, combinations of realized volatil¬ities, forecasting
JEL codes: C32
Volume: 14
Issue: 11
Date: Friday, July 22, 2016
Revision Date: Friday, July 22, 2016