Vast Volatility Matrix Estimation Using High-Frequency Data for Portfolio Selection

Jianqing Fan

doi:10.1080/01621459.2012.656041

2012-03-01

Jianqing Fan *

Yingying Li

Ke Yu

DOI：10.1080/01621459.2012.656041

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摘要

En 中文

Portfolio allocation with gross-exposure constraint is an effective method to increase the efficiency and stability of portfolios selection among a vast pool of assets, as demonstrated by Fan, Zhang, and Yu. The required high-dimensional volatility matrix can be estimated by using high-frequency financial data. This enables us to better adapt to the local volatilities and local correlations among a vast number of assets and to increase significantly the sample size for estimating the volatility matrix. This article studies the volatility matrix estimation using high-dimensional, high-frequency data from the perspective of portfolio selection. Specifically, we propose the use of pairwise-refresh time and all-refresh time methods based on the concept of refresh time proposed by Barndorff-Nielsen, Hansen, Lunde, and Shephard for the estimation of vast covariance matrix and compare their merits in the portfolio selection. We establish the concentration inequalities of the estimates, which guarantee desirable properties of the estimated volatility matrix in vast asset allocation with gross-exposure constraints. Extensive numerical studies are made via carefully designed simulations. Comparing with the methods based on low-frequency daily data, our methods can capture the most recent trend of the time varying volatility and correlation, hence provide more accurate guidance for the portfolio allocation in the next time period. The advantage of using high-frequency data is significant in our simulation and empirical studies, which consist of 50 simulated assets and 30 constituent stocks of Dow Jones Industrial Average index.

Keyword:

Concentration inequalities

High-frequency data

Portfolio allocation

Refresh time

Risk assessment

Volatility matrix estimation