Forecasting large covariance matrix with high-frequency data: A factor correlation matrix approach

• Main Authors: DONG, Yingjie, TSE, Yiu Kuen
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Large correlation matrix; Nonlinear shrinkage; Dimension reduction; Eigenanalysis; Factor model; High-Frequency data; Econometrics
• Online Access: https://ink.library.smu.edu.sg/soe_research/2270; https://ink.library.smu.edu.sg/context/soe_research/article/3269/viewcontent/FCM_20181025.pdf
• Institution: Singapore Management University

We propose a factor correlation matrix approach to forecast large covariance matrix of asset returns using high-frequency data. We apply shrinkage method to estimate large correlation matrix and adopt principal component method to model the underlying latent factors. A vector autoregressive model is...