# Gustav Alfelt: Modeling the covariance matrix of financial asset returns

**Tid: **
To 2021-05-20 kl 13.00

**Plats: **
Zoom, email for ID

**Ämnesområde: **
Mathematical Statistics

**Respondent: **
Gustav Alfelt

**Opponent: **
Vasyl Golosnoy (Ruhr-University Bochum)

**Handledare: **
Joanna Tyrcha

**DiVA Link:
urn.kb.se/resolve?urn=urn%3Anbn%3Ase%3Asu%3Adiva-191175
**

### Abstract

The covariance matrix of asset returns, which describes the fluctuation of asset prices, plays a crucial role in understanding and predicting financial markets and economic systems. In recent years, the concept of realized covariance measures has become a popular way to accurately estimate return covariance matrices using high-frequency data. This thesis contains five research papers that study time series of realized covariance matrices, estimators for related random matrix distributions, and cases where the sample size is smaller than the number of assets considered.

Paper I provides several goodness-of-fit tests for discrete realized covariance matrix time series models that are driven by an underlying Wishart process. The test methodology is based on an extended version of Bartlett's decomposition, allowing to obtain independent and standard normally distributed random variables under the null hypothesis. The paper includes a simulation study that investigates the tests' performance under parameter uncertainty, as well as an empirical application of the popular conditional autoregressive Wishart model fitted to data on six stocks traded over eight and a half years.

Paper II derives the Stein-Haff identity for exponential random matrix distributions, a class which for example contains the Wishart distribution. It furthermore applies the derived identity to the matrix-variate gamma distribution, providing an estimator that dominates the maximum likelihood estimator in terms of Stein's loss function. Finally, the theoretical results are supported by a simulation study.

Paper III supplies a novel closed-form estimator for the parameters of the matrix-variate gamma distribution. The estimator appears to have several benefits over the typically applied maximum likelihood estimator, as revealed in a simulation study. Applying the proposed estimator as a start value for the numerical optimization procedure required to find the maximum likelihood estimate is also shown to reduce computation time drastically, when compared to applying arbitrary start values.

Paper IV introduces a new model for discrete time series of realized covariance matrices that obtain as singular. This case occur when the matrix dimension is larger than the number of high frequency returns available for each trading day. As the model naturally appears when a large number of assets are considered, the paper also focuses on maintaining estimation feasibility in high dimensions. The model is fitted to 20 years of high frequency data on 50 stocks, and is evaluated by out-of-sample forecast accuracy, where it outperforms the typically considered GARCH model with high statistical significance.

Paper V is concerned with estimation of the tangency portfolio vector in the case where the number of assets is larger than the available sample size. The estimator contains the Moore-Penrose inverse of a Wishart distributed matrix, an object for which the mean and dispersion matrix are yet to be derived. Although no exact results exist, the paper extends the knowledge of statistical properties in portfolio theory by providing bounds and approximations for the moments of this estimator as well as exact results in special cases. Finally, the properties of the bounds and approximations are investigated through simulations.

**Zoom Notes:** In order to get registered, send an email to Dmitry Otryakhin at
otryakhin@math.su.se
.