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arXiv · 2509.23533

Rethinking Portfolio Risk: Forecasting Volatility Through Cointegrated Asset Dynamics

Gabriele Casto
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Abstract

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.

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Gabriele Casto. 2025-09-28. Rethinking Portfolio Risk: Forecasting Volatility Through Cointegrated Asset Dynamics. https://arxiv.org/abs/2509.23533

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