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HAR-RV with Sector Variance

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1 HAR-RV with Sector Variance
Sharon Lee April 1, 2009

2 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.

3 Sectors Consumer Goods Healthcare Financial Technology Basic Materials
Industrials Utilities Conglomerates Services Stocks with less than 2000 observations were removed

4 HAR-RV Models 1) Single stock on stock’s regressors
2) Single stock on stock’s regressors and its sector’s regressors 3) Single stock on stock’s regressors, sector’s regressors, and market’s regressors

5 Consumer Goods Sector AVP AVON PRODUCTS INC CL COLGATE PALMOLIVE CPB
CAMPBELL SOUP CO F FORD MOTOR CO HNZ HEINZ H J CO IP INTL PAPER *not in downloads KFT KRAFT FOODS INC KO COCA COLA CO THE MO ALTRIA GROUP INC PEP PEPSICO INC PG PROCTER GAMBLE CO PM PHILIP MORRIS INTL *less than 2000 observations SLE SARA LEE CP XRX XEROX CP

6 Consumer Goods Sector Model Fits Day Sector Week Month PG (Consumer)
Day Sector Week Month PG (Consumer) 0.3184 0.3606 13% 0.4569 0.5870 28% 0.4858 0.5729 18% Day, Sect +Mkt Wk, Sect Mo, Sect PG (Consumer) 13% 25% 28% -10% 18% -3% Consumer F pf Day Week Month

7 Healthcare ABT ABBOTT LABORATORIES AMGN Amgen Inc. BAX BAXTER INTL INC
BMY BRISTOL MYERS SQIBB CI CIGNA CP *not in downloads COV COVIDIEN LTD *less than 2000 observations JNJ JOHNSON AND JOHNS DC MDT MEDTRONIC INC MRK MERCK CO INC PFE PFIZER INC UNH UNITEDHEALTH GROUP WYE WYETH *less than 2000 observations

8 Healthcare Model Fits Day Sector Week Month JNJ (Healthcare) 0.3807
Day Sector Week Month JNJ (Healthcare) 0.3807 0.5284 39% 0.5100 0.6482 27% 0.4706 0.5475 16% Day, Sect +Mkt Wk, Sect Mo, Sect JNJ (Healthcare) 39% -14% 27% -18% 16% 0% Health Care Day Week Month

9 Financial AIG AMER INTL GROUP INC *not in downloads ALL ALLSTATE CP
AXP AMER EXPRESS INC BAC BK OF AMERICA CP BK BANK OF NY MELLON CP C CITIGROUP INC COF CAPITAL ONE FINANCIA GS GOLDMAN SACHS GRP HIG HARTFORD FIN SVC *not in downloads JPM JP MORGAN CHASE CO MS MORGAN STANLEY *less than 2000 observations NYX NYSE EURONEXT *less than 2000 observations RF REGIONS FINANCIAL CP *less than 2000 observations USB US BANCORP WB WACHOVIA CP *not in downloads

10 Financial Model Fits Day Sector Week Month JPM (Financial) 0.4595
Day Sector Week Month JPM (Financial) 0.4595 0.5092 11% 0.4704 0.5325 13% 0.5039 0.5160 2% Day, Sect +Mkt Wk, Sect Mo, Sect JPM (Financial) 11% -10% 13% -1% 2% 7% Financial Day Week Month

11 Technology CSCO Cisco Systems, Inc. Technology DELL Dell Inc. EMC
E M C CP GOOG Google Inc. Technology *less than 2000 HPQ HEWLETT PACKARD CO IBM INTL BUSINESS MACH INTC Intel Corporation MSFT Microsoft Corporation ORCL Oracle Corporation QCOM QUALCOMM Incorporated S SPRINT NXTEL CP T AT&T INC. TXN TEXAS INSTRUMENTS TYC TYCO INTL LTD NEW VZ VERIZON COMMUN

12 Technology Model Fits Day Sector Week Month ORCL (Technology) 0.3184
Day Sector Week Month ORCL (Technology) 0.3184 0.4529 42% 0.4569 0.5287 16% 0.4858 0.5706 17% Day, Sect +Mkt Wk, Sect Mo, Sect ORCL (Technology) 42% 7% 16% -14% 17% -1% Technology Day Week Month

13 Basic Materials AA ALCOA INC Basic Materials BHI BAKER HUGHES INTL COP
CONOCOPHILLIPS CVX CHEVRON CORP DD DU PONT E I DE NEM DOW DOW CHEMICAL EP EL PASO CORPORATION HAL HALLIBURTON CO NOV NATL OILWELL VARCO OXY OCCIDENTAL PET SLB SCHLUMBERGER LTD WMB WILLIAMS COS XOM EXXON MOBIL CP

14 Basic Materials Model Fits Day Sector Week Month AA (Basic Materials)
Day Sector Week Month AA (Basic Materials) 0.4967 0.5587 12% 0.5952 0.6735 13% 0.5254 0.5392 3% Day, Sect +Mkt Wk, Sect Mo, Sect AA (Basic Materials) 12% -13% 13% -20% 3% 2% Basic Materials Day Week Month

15 Conglomerates GE GEN ELECTRIC CO Conglomerates MMM 3M COMPANY UTX
UNITED TECH

16 Conglomerates Model Fits Day Sector Week Month MMM (Conglomerates)
Day Sector Week Month MMM (Conglomerates) 0.5341 0.5504 3% 0.6526 0.6723 0.5633 0.6004 7% Day, Sect +Mkt Wk, Sect Mo, Sect MMM (Conglomerates) 3% -17% -21% 7% -6% Conglomerates Day Week Month

17 Industrial BA BOEING CO Industrial CAT CATERPILLAR INC GD
GEN DYNAMICS CP HON HONEYWELL INTL INC RTN RAYTHEON CO (NEW) *less than 2000 observations WY WEYERHAEUSER CO

18 Industrial Model Fits Day Sector Week Month HON (Industrials) 0.3808
Day Sector Week Month HON (Industrials) 0.3808 0.4452 17% 0.5137 0.5599 9% 0.4495 0.4874 8% Day, Sect +Mkt Wk, Sect Mo, Sect HON (Industrials) 17% 0% 9% 8% Industrials Day Week Month

19 Services AMZN Amazon.com Services BNI BURLINGTN N SANTE FE CBS
CBS CORP CL B *not found CMCSA Comcast Corporation CVS CVS CAREMARK CP DIS WALT DISNEY-DISNEY C FDX FEDEX CORP HD HOME DEPOT INC MA MASTERCARD INC *less than 2000 observations MCD MCDONALDS CP NSC NORFOLK SO CP TGT TARGET CP TWX TIME WARNER INC UPS UNITED PARCEL SVC WMT WAL MART STORES

20 Services Model Fits Day Sector Week Month TGT (Services) 0.5655 0.5654
Day Sector Week Month TGT (Services) 0.5655 0.5654 0% 0.6702 0.6711 0.6082 0.6132 1% Day, Sect +Mkt Wk, Sect Mo, Sect TGT (Services) 0% -20% -21% 1% -5% Services Day 0.999 Week 2.74E-138 Month

21 Utilities Model Fits AEP AMER ELECTRIC POW CO Utilities AES
AES CORPORATION *not found ETR ENTERGY CP EXC EXELON CORPORATION SO SOUTHERN CO Model Fits

22 Utilities Model Fits Day Sector Week Month EXC (Utilities) 0.5015
Day Sector Week Month EXC (Utilities) 0.5015 0.5011 0% 0.628 0.6284 0.5293 0.5336 1% Day, Sect +Mkt Wk, Sect Mo, Sect EXC (Utilities) 0% -10% -17% 1% 2% Utilities Day 1 Week 1.84E-31 Month

23 Adjusted R-squared Comparison
Day Sector Week Month PG (Consumer) 0.3184 0.3606 13% 0.4569 0.5870 28% 0.4858 0.5729 18% JNJ (Healthcare) 0.3807 0.5284 39% 0.5100 0.6482 27% 0.4706 0.5475 16% JPM (Financial) 0.4595 0.5092 11% 0.4704 0.5325 0.5039 0.5160 2% ORCL (Technology) 0.4529 42% 0.5287 0.5706 17% AA (Basic Materials) 0.4967 0.5587 12% 0.5952 0.6735 0.5254 0.5392 3% MMM (Conglomerates) 0.5341 0.5504 0.6526 0.6723 0.5633 0.6004 7% HON (Industrials) 0.3808 0.4452 0.5137 0.5599 9% 0.4495 0.4874 8% TGT (Services) 0.5655 0.5654 0% 0.6702 0.6711 0.6082 0.6132 1% EXC (Utilities) 0.5015 0.5011 0.628 0.6284 0.5293 0.5336

24 F-Tests Consumer F pf Day 24.81991 Week 161.2798 Month 152.7373
Week Month Financial Day Week Month Utilities Day 1 Week 1.84E-31 Month Basic Materials Day Week Month Industrials Day Week Month Health Care Day Week Month Conglomerates Day Week Month Services Day 0.999 Week 2.74E-138 Month Technology Day Week Month

25 Market Regressors Added
Day, Sect +Mkt Wk, Sect Mo, Sect PG (Consumer) 13% 25% 28% -10% 18% -3% JNJ (Healthcare) 39% -14% 27% -18% 16% 0% JPM (Financial) 11% -1% 2% 7% ORCL (Technology) 42% 17% AA (Basic Materials) 12% -13% -20% 3% MMM (Conglomerates) -17% -21% -6% HON (Industrials) 9% 8% TGT (Services) 1% -5% EXC (Utilities)

26 next Explanations for market variables
R-squared patterns among sectors Incorporate risk factors Further analysis

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