UZH-Logo

Maintenance Infos

Large dynamic covariance matrices


Engle, Robert F; Ledoit, Olivier; Wolf, Michael (2016). Large dynamic covariance matrices. Working paper series / Department of Economics 231, University of Zurich.

Abstract

Second moments of asset returns are important for risk management and portfolio selection. The problem of estimating second moments can be approached from two angles: time series and the cross-section. In time series, the key is to account for conditional heteroskedasticity; a favored model is Dynamic Conditional Correlation (DCC), derived from the ARCH/GARCH family started by Engle (1982). In the cross-section, the key is to correct in-sample biases of sample covariance matrix eigenvalues; a favored model is nonlinear shrinkage, derived from Random Matrix Theory (RMT). The present paper aims to marry these two strands of literature in order to deliver improved estimation of large dynamic covariance matrices.

Second moments of asset returns are important for risk management and portfolio selection. The problem of estimating second moments can be approached from two angles: time series and the cross-section. In time series, the key is to account for conditional heteroskedasticity; a favored model is Dynamic Conditional Correlation (DCC), derived from the ARCH/GARCH family started by Engle (1982). In the cross-section, the key is to correct in-sample biases of sample covariance matrix eigenvalues; a favored model is nonlinear shrinkage, derived from Random Matrix Theory (RMT). The present paper aims to marry these two strands of literature in order to deliver improved estimation of large dynamic covariance matrices.

Downloads

5 downloads since deposited on 10 Aug 2016
5 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:C13, C58, G11
Uncontrolled Keywords:Composite likelihood, dynamic conditional correlations, GARCH, Markowitz portfolio selection, nonlinear shrinkage
Language:English
Date:July 2016
Deposited On:10 Aug 2016 13:10
Last Modified:10 Aug 2016 13:10
Series Name:Working paper series / Department of Economics
Number of Pages:39
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp231.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php
Permanent URL: https://doi.org/10.5167/uzh-125469

Download

[img]
Preview
Content: Published Version
Filetype: PDF
Size: 512kB

TrendTerms

TrendTerms displays relevant terms of the abstract of this publication and related documents on a map. The terms and their relations were extracted from ZORA using word statistics. Their timelines are taken from ZORA as well. The bubble size of a term is proportional to the number of documents where the term occurs. Red, orange, yellow and green colors are used for terms that occur in the current document; red indicates high interlinkedness of a term with other terms, orange, yellow and green decreasing interlinkedness. Blue is used for terms that have a relation with the terms in this document, but occur in other documents.
You can navigate and zoom the map. Mouse-hovering a term displays its timeline, clicking it yields the associated documents.

Author Collaborations