[Research Seminar] Finance: “Realized covariance modeling, forceast error variance decompositions and a model-based diebold-yilmaz index” M. CAPORIN – University of Padova

Speaker: Massimiliano CAPORIN
University of  Padova

Co-authored with Giuseppe Storti, University of Salerno

Date and Location – Thursday January 13th 2022 from 13:30 to 15:00 on Zoom

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ABSTRACT

A generalized version of the spillover index of Diebold and Yilmaz is derived from a Conditional Autoregressive Wishart model (CAW). The CAW model is first estimated by Quasi Maximum Likelihood under L1-penalization and taking advantage of the analytical gradient. The spillover index is then computed, accounting for the interdependence between realized variances and covariances. To recover the index, a novel rectangular forecast error variance decomposition is introduced, assuming shocks on N equity returns and a reaction on the N realized variances and the 0.5N(N-1) realized covariances. Empirical examples contrast our index to a benchmark specification including only spillover between realized variances.