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highfrequency (version 0.7.0.1)

HEAVYmodel: HEAVY Model estimation

Description

This function calculates the High frEquency bAsed VolatilitY (HEAVY) model proposed in Shephard and Sheppard (2010). This function is used as a predictive volatility model built to exploit highfrequency data.

Usage

HEAVYmodel(
  data,
  p = matrix(c(0, 0, 1, 1), ncol = 2),
  q = matrix(c(1, 0, 0, 1), ncol = 2),
  startingValues = NULL,
  LB = NULL,
  UB = NULL,
  backCast = NULL,
  compConst = FALSE
)

Arguments

data

a (T x K) matrix containing the data, with T the number of days. For the traditional HEAVY model: K = 2, the first column contains the squared daily demeaned returns, the second column contains the realized measures.

p

a (K x K) matrix containing the lag length for the model innovations. Position (i, j) in the matrix indicates the number of lags in equation i of the model for the innovations in data column j. For the traditional heavy model p is given by matrix(c(0,0,1,1), ncol = 2) (default).

q

a (K x K) matrix containing the lag length for the conditional variances. Position (i, j) in the matrix indicates the number of lags in equation i of the model for conditional variances corresponding to series j. For the traditional heavy model introduced above q is given by matrix( c(1,0,0,1),ncol=2 ) (default).

startingValues

a vector containing the starting values to be used in the optimization to find the optimal parameters estimates.

LB

a vector of length K indicating the lower bounds to be used in the estimation. If NULL it is set to a vector of zeros by default.

UB

a vector of length K indicating the upper bounds to be used in the estimation. If NULL it is set to a vector of Inf by default.

backCast

a vector of length K used to initialize the estimation. If NULL the unconditional estimates are taken.

compConst

a boolean variable. In case TRUE, the omega values are estimated in the optimization. In case FALSE, volatility targeting is done and omega is just 1 minus the sum of all relevant alpha's and beta's multiplied by the unconditional variance.

Value

A list with the following values: (i) loglikelihood: the log likelihood evaluated at the parameter estimates. (ii) likelihoods: an xts object of length T containing the log likelihoods per day. (iii) condvar: a (T x K) xts object containing the conditional variances (iv) estparams: a vector with the parameter estimates. The order in which the parameters are reported is as follows: First the estimates for omega then the estimates for the non-zero alpha's with the most recent lags first in case max(p) > 1, then the estimates for the non-zero beta's with the most recent lag first in case max(q) > 1. (v) convergence: an integer code indicating the successfulness of the optimization. See optim for more information.

Details

Assume there are \(T\) daily returns and realized measures in the period \(t\). Let \(r_i\) and \(RM_i\) be the \(i^{th}\) daily return and daily realized measure respectively (with \(i=1, \ldots,T\)).

The most basic heavy model is the one with lag matrices p of \(\left( \begin{array}{ccc} 0 & 1 \\ 0 & 1 \end{array} \right)\) and q of \(\left( \begin{array}{ccc} 1 & 0 \\ 0 & 1 \end{array} \right)\). This can be represented by the following equations: $$ \mbox{var}{\left(r_t \right)} = h_t = w + \alpha RM_{t-1} + \beta h_{t-1}; w,\alpha \geq 0, \beta \in [0,1] $$ $$ \mbox{E}{\left(RM_t \right)} = \mu_t = w_R + \alpha_R RM_{t-1} + \beta_R \mu_{t-1}; w_R,\alpha_R, \beta_R \geq 0, \alpha_R+\beta_R \in [0,1] $$

Equivalently, they can be presented in terms of matrix notation as below: $$ \left( \begin{array}{ccc} h_t \\ \mu_t \end{array} \right) = \left( \begin{array}{ccc} w \\ w_R \end{array} \right) + \left( \begin{array}{ccc} 0 & \alpha \\ 0 & \alpha_R \end{array} \right) \left( \begin{array}{ccc} r^2_{t-1} \\ RM_{t-1} \end{array} \right) + \left( \begin{array}{ccc} \beta & 0 \\ 0 & \beta_R \end{array} \right) \left( \begin{array}{ccc} h_{t-1} \\ \mu_{t-1} \end{array} \right) $$

In this version, the parameters vector to be estimated is \(\left( w, w_R,\alpha, \alpha_R, \beta, \beta_R \right) \).

In terms of startingValues, Shephard and Sheppard recommend for this version of the Heavy model to set \(\beta\) be around 0.6 and sum of \(\alpha\)+\(\beta\) to be close to but slightly less than one. In general, the lag length for the model innovation and the conditional covariance can be greater than 1. Consider, for example, matrix p is \(\left( \begin{array}{ccc} 0 & 2 \\ 0 & 1 \end{array} \right)\) and matrix q is the same as above. Matrix notation will be as below: $$ \left( \begin{array}{ccc} h_t \\ \mu_t \end{array} \right) = \left( \begin{array}{ccc} w \\ w_R \end{array} \right) + \left( \begin{array}{ccc} 0 & \alpha_1 \\ 0 & \alpha_R \end{array} \right) \left( \begin{array}{ccc} r^2_{t-1} \\ RM_{t-1} \end{array} \right) +\left( \begin{array}{ccc} 0 & \alpha_2 \\ 0 & 0 \end{array} \right) \left( \begin{array}{ccc} r^2_{t-2} \\ RM_{t-2} \end{array} \right) + \left( \begin{array}{ccc} \beta & 0 \\ 0 & \beta_R \end{array} \right) \left( \begin{array}{ccc} h_{t-1} \\ \mu_{t-1} \end{array} \right)$$

In this version, the parameters vector to be estimated is \(\left( w, w_R,\alpha_1, \alpha_R, \alpha_2, \beta, \beta_R \right) \).

References

Shephard, N. and K. Sheppard (2010). Realising the future: forecasting with high frequency based volatility (heavy) models. Journal of Applied Econometrics 25, 197-231.

Examples

Run this code
# NOT RUN {
# Implementation of the heavy model on DJI:
returns <-  realizedLibrary$open_to_close
bv      <-  realizedLibrary$bv
returns <- returns[!is.na(bv)]
bv <- bv[!is.na(bv)] # Remove NA's
data <- cbind( returns^2, bv) # Make data matrix with returns and realized measures
backCast <- matrix(c(var(returns), mean(bv)), ncol = 1)

#For traditional (default) version:
startvalues <- c(0.004,0.02,0.44,0.41,0.74,0.56) # Initial values
output <- HEAVYmodel(data = as.matrix(data,ncol=2), compConst=FALSE,
                     startingValues = startvalues, backCast=backCast)
#For general version:
startvalues <- c(0.004, 0.02, 0.44, 0.4, 0.41, 0.74, 0.56) # Initial values;
p <- matrix(c(2, 0, 0, 1), ncol = 2)
q <- matrix(c(1, 0, 0, 1), ncol = 2)

heavy_model <- HEAVYmodel(data = as.matrix(data, ncol = 2), p = p, q = q, compConst = FALSE,
                      startingValues = startvalues, backCast = backCast)

# }

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