Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/53920
Authors: 
Bauer, Gregory H.
Vorking, Keith
Year of Publication: 
2007
Series/Report no.: 
Bank of Canada Working Paper 2007,20
Abstract: 
We present a new matrix-logarithm model of the realized covariance matrix of stock returns. The model uses latent factors which are functions of both lagged volatility and returns. The model has several advantages: it is parsimonious; it does not require imposing parameter restrictions; and, it results in a positive-definite covariance matrix. We apply the model to the covariance matrix of size-sorted stock returns and find that two factors are sufficient to capture most of the dynamics. We also introduce a new method to track an index using our model of the realized volatility covariance matrix.
Subjects: 
Econometric and statistical methods
Financial markets
JEL: 
G14
C53
C32
Document Type: 
Working Paper

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