High-dimensional covariance forecasting for short intra-day horizons

Asset return covariances at intra-day horizons are known to tend towards zero due to market microstructure effects. Thus, traders who simply scale their daily covariance forecast to match their trading horizon are likely to over-estimate the actual experienced asset dependence. In this paper, some of the key challenges are discussed that are encountered when forecasting high-dimensional covariance matrices for short intra-day horizons. Based on a novel evaluation methodology, and extensive empirical analysis, specific recommendations are made regarding model design and data sampling.