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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Large Dynamic Covariance Matrices: Enhancements Based on Intraday Data
Organization Unit
  • Gianluca De Nard
  • Robert F. Engle
  • Olivier Ledoit
  • Michael Wolf
  • English
Institution University of Zurich
Series Name -
Number -
Date 2020
Abstract Text Modeling and forecasting dynamic (or time-varying) covariance matrices has many important applications in finance, such as Markowitz portfolio selection. A popular tool to this end are multivariate GARCH models. Historically, such models did not perform well in large dimensions due to the so-called curse of dimensionality. The recent DCC-NL model of Engle et al. (2019) is able to overcome this curse via nonlinear shrinkage estimation of the unconditional correlation matrix. In this paper, we show how performance can be increased further by using open/high/low/close (O/H/L/C) price data instead of simply using daily returns. A key innovation is the concept of a synthetic return, which is obtained from a volatility proxy in conjunction with a smoothed sign (function) of the observed return.
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