Combination ofmultivariate volatilityforecasts

This paper proposes a novel approach to the combination of conditional covariancematrix forecasts based on the use of the Generalized Method of Moments (GMM). Itis shown how the procedure can be generalized to deal with large dimensional systemsby means of a two-step strategy. The finite sample properties of the GMM estimatorof the combination weights are investigated by Monte Carlo simulations. Finally, inorder to give an appraisal of the economic implications of the combined volatilitypredictor, the results of an application to tactical asset allocation are presented.