Realized Factor GARCH



We introduce a multivariate GARCH model that utilizes realized measures of volatility and correlations. The model has a hierarchal factor structure, where the core of the model specifies the underlying volatility factors, which form the basis for the modeling of all individual returns series. This structure makes the model tractable and scalable. We apply the model to US equity data, where the underlying factor structure is deduced from industry specific exchange-traded index funds.


Co-author: Asger Lunde