A Thick Modeling Approach to Multivariate Volatility Prediction

This paper proposes a modified approach to the combination of forecasts from multivariate volatility models where the combination is performed over a restricted subset including only the best performing models. Such a subset is identified over a rolling window by means of the Model Confidence Set (MCS) approach. The analysis is performed using different combination schemes, both linear and non linear, and considering different loss functions for the evaluation of the forecasting performance. An application to a vast dimensional portfolio of 50 NYSE stocks shows that (a) in non-extreme volatility periods the use of forecast combinations allows to improve over the predictive accuracy of the single candidate models (b) performing the combination over the subset of most accurate models does not significantly reduce the accuracy of the combined predictor.