Efficient Evaluation of Multidimensional Time-Varying Density Forecasts with an Application to Risk Management
AbstractWe propose two simple evaluation methods for time varying density forecasts of continuous higher dimensional random variables. Both methods are based on the probability integral transformation for unidimensional forecasts. The first method tests multinormal densities and relies on the rotation of the coordinate system. The advantage of the second method is not only its applicability to any continuous distribution but also the evaluation of the forecast accuracy in specific regions of its domain as defined by the user’s interest. We show that the latter property is particularly useful for evaluating a multidimensional generalization of the Value at Risk. In simulations and in an empirical study, we examine the performance of both tests.
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Bibliographic InfoPaper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 09/617.
Length: 33 pages
Date of creation: Dec 2009
Date of revision:
Multivariate Density Forecast Evaluation; Probability Integral Transformation; Multidimensional Value at Risk; Monte Carlo Simulations;
Find related papers by JEL classification:
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-02 (All new papers)
- NEP-BAN-2010-10-02 (Banking)
- NEP-ECM-2010-10-02 (Econometrics)
- NEP-FOR-2010-10-02 (Forecasting)
- NEP-ORE-2010-10-02 (Operations Research)
- NEP-RMG-2010-10-02 (Risk Management)
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