A partial correlation vine based approach for modeling and forecasting multivariate volatility time-series

02/26/2018

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by   Nicole Barthel, et al.

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A novel approach for dynamic modeling and forecasting of realized covariance matrices is proposed. Realized variances and realized correlation matrices are jointly estimated. The one-to-one relationship between a positive definite correlation matrix and its associated set of partial correlations corresponding to any vine specification is used. A method to select a vine structure, which allows for parsimonious time-series modeling, is introduced. The predicted partial correlations have a clear practical interpretation. Being algebraically independent they do not underlie any algebraic constraint. The forecasting performance is evaluated through investigation of six-dimensional real data and is compared to Cholesky decomposition based benchmark models.