Topic: Modeling and Forecasting (Un)Reliable Realized Covariances for More Reliable Financial Decisions

Speaker: Tim Bollerslev, Juanita and Clifton Kreps Professor of Economics, Duke University

Date: June 16th (Friday)

Time: 10:00-11:30am

Location: Building 4, Room 101

Language: English

Abstract:

We propose a new framework for modeling and forecasting common financial risks based on (un)reliable realized covariance measures constructed from high-frequency intraday data. Our new approach explicitly incorporates the effect of measurement errors and time-varying attenuation biases into the covariance forecasts, by allowing the ex-ante predictions to respond more (less) aggressively to changes in the ex-post realized covariance measures when they are more (less) reliable. Applying the new procedures in the construction of minimum variance and minimum tracking error portfolios results in reduced turnover and statistically superior positions compared to existing procedures. Translating these statistical improvements into economic gains, we find that under empirically realistic assumptions a risk-averse investor would be willing to pay up to 170 basis points per year to shift to using the new class of forecasting models.

About the speaker:

Tim Bollerslev is the first Juanita and Clifton Kreps Distinguished Professor of Economics at Duke University, Professor of Finance at the Fuqua School of Business, and Research Director for the Duke Financial Economics Center (DFE).  He is an elected fellow of the Econometric Society and the American Statistical Association, a longtime Research Associate at the National Bureau of Economic Research (NBER), and an International Research Fellow at the Center for Research in Time Series Econometrics (CREATES) at the University of Aarhus, Denmark.  Prior to joining Duke, Dr. Bollerslev has held positions as the Sharpe Distinguished Professor of Finance at the Kellogg Graduate School of Management at Northwestern University, and the Commonwealth Professor of Economics at the University of Virginia.

Much of Dr. Bollerslev’s research has focused on measuring, modeling and forecasting financial market volatility.  Many of the ideas developed by Dr. Bollerslev are now routinely used by economists and finance practitioners all over the world.  He has published extensively in all of the leading academic journals in the field, and lectured at numerous international conferences, universities, and other institutions.  He is the author of two of the three most cited papers in the Journal of Econometrics, and routinely ranked among the most cited economists in the world.

A native of Denmark, Dr. Bollerslev received his M.S. degree in Economics and Mathematics from the University of Aarhus, Denmark, and his Ph.D. degree in Economics from the University of California, San Diego.