Rethinking Portfolio Risk: Forecasting Volatility Through Cointegrated Asset Dynamics
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arXiv
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| Format: | Preprint |
| Published: |
2025
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| _version_ | 1866916974436548608 |
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| author | Casto, Gabriele |
| author_facet | Casto, Gabriele |
| contents | We introduce the Historical and Dynamic Volatility Ratios (HVR/DVR) and show that equity and index volatilities are cointegrated at intraday and daily horizons. This allows us to construct a VECM to forecast portfolio volatility by exploiting volatility cointegration. On S&P 500 data, HVR is generally stationary and cointegration with the index is frequent; the VECM implementation yields substantially lower mean absolute percentage error (MAPE) than covariance-based forecasts at short- to medium-term horizons across portfolio sizes. The approach is interpretable and readily implementable, factorizing covariance into market volatility, relative-volatility ratios, and correlations. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2509_23533 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Rethinking Portfolio Risk: Forecasting Volatility Through Cointegrated Asset Dynamics Casto, Gabriele Portfolio Management Risk Management 91G70 (Primary), 62P05 (Secondary) We introduce the Historical and Dynamic Volatility Ratios (HVR/DVR) and show that equity and index volatilities are cointegrated at intraday and daily horizons. This allows us to construct a VECM to forecast portfolio volatility by exploiting volatility cointegration. On S&P 500 data, HVR is generally stationary and cointegration with the index is frequent; the VECM implementation yields substantially lower mean absolute percentage error (MAPE) than covariance-based forecasts at short- to medium-term horizons across portfolio sizes. The approach is interpretable and readily implementable, factorizing covariance into market volatility, relative-volatility ratios, and correlations. |
| title | Rethinking Portfolio Risk: Forecasting Volatility Through Cointegrated Asset Dynamics |
| topic | Portfolio Management Risk Management 91G70 (Primary), 62P05 (Secondary) |
| url | https://arxiv.org/abs/2509.23533 |