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HAR-RV with Sector Variance

HAR-RV with Sector Variance. Sharon Lee March 18, 2009. Intuition. The returns of an individual equity should be correlated with returns from its sector Using the predictive model HAR-RV, how does incorporating sector realized volatility affect the predicted values for an equity?.

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HAR-RV with Sector Variance

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  1. HAR-RV with Sector Variance Sharon Lee March 18, 2009

  2. Intuition • The returns of an individual equity should be correlated with returns from its sector • Using the predictive model HAR-RV, how does incorporating sector realized volatility affect the predicted values for an equity?

  3. Background Mathematics Realized Variance, where rt,j is the log-return Sector Realized Variance: Average of equally-weighted same sector stocks in S&P100

  4. HAR-RV Model • HAR-RV makes use of average realized variance over daily, weekly, and monthly periods. • h=1 corresponds to daily periods, h=5 corresponds to weekly periods, h=22 corresponds to monthly periods • These time horizons correspond to day-ahead, 5-day ahead, and month-ahead predictions of average realized variance.

  5. Sectors • Consumer Goods • Healthcare • Financial • Technology • Stocks with less than 2000 observations were removed

  6. Consumer Goods Sector

  7. PG and Sector: Annualized RV

  8. PG, Sector, Day

  9. PG, Sector, Week

  10. PG, Sector, Month

  11. PG Regression

  12. PG and Sector Regression

  13. Healthcare

  14. JNJ and Sector: Annualized RV

  15. JNJ, Sector, Day

  16. JNJ, Sector, Week

  17. JNJ, Sector, Month

  18. JNJ Regression

  19. JNJ and Sector Regression

  20. Financial

  21. JPM and Sector: Annualized RV

  22. JPM, Sector, Day

  23. JPM, Sector, Week

  24. JPM, Sector, Month

  25. JPM Regression

  26. JPM and Sector Regression

  27. Technology

  28. ORCL, Sector, Day

  29. ORCL, Sector, Week

  30. ORCL, Sector, Month

  31. ORCL Regression

  32. ORCL and Sector Regression

  33. Comparison Across Regressions

  34. New Questions • Since the R-squared analyses show that sector variance affects individual stocks in different degrees, what can be said about investor behavior for particular sectors across each time horizon? • Do the risk factor (beta) for sectors have any correlation with results?

  35. Next Steps… • Add Basic Materials, Industrial, Services, and Utilities Sectors • Investigate betas

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