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Portfolio Selection with Time-Varying Value-at-Risk

In: Financial Econometrics Modeling: Market Microstructure, Factor Models and Financial Risk Measures

Author

Listed:
  • Erick W. Rengifo
  • Jeroen V. K. Rombouts

Abstract

We propose a portfolio-selection model that maximizes expected returns subject to a time-varying value-at-risk constraint. The model allows for time-varying skewness and kurtosis of portfolio distributions estimating the model parameters by weighted maximum likelihood in an increasing-window setup. We determine the best daily investment recommendations in terms of percentage to borrow or lend and the optimal weights of the assets in a risky portfolio. An empirical application illustrates in an out-of-sample context which models are preferred from a statistical and economic point of view.

Suggested Citation

  • Erick W. Rengifo & Jeroen V. K. Rombouts, 2011. "Portfolio Selection with Time-Varying Value-at-Risk," Palgrave Macmillan Books, in: Greg N. Gregoriou & Razvan Pascalau (ed.), Financial Econometrics Modeling: Market Microstructure, Factor Models and Financial Risk Measures, chapter 9, pages 213-234, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-29810-1_9
    DOI: 10.1057/9780230298101_9
    as

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