A Multivariate Realized GARCH Model (2012.02708v2)

Abstract: We propose a novel class of multivariate GARCH models that utilize realized measures of volatilities and correlations. The central component is an unconstrained vector parametrization of the conditional correlation matrix that facilitates factor models for correlations. This offers an elegant solution to the primary challenge that plagues multivariate GARCH models in high-dimensional settings. As an illustration, we consider block correlation structures that naturally simplify to linear factor models for the conditional correlations. We apply the model to returns of nine assets and inspect in-sample and out-of-sample model performance in comparison with several popular benchmarks.