Dependence Calibration and Portfolio Fit with FactorBased Time Changes
AbstractThe paper explores the fit properties of a class of multivariate Lévy processes, which are characterized as time-changed correlated Brownian motions. The time-change has a common and an idiosyncratic component, to re ect the properties of trade, which it represents. The resulting process may provide Variance-Gamma, Normal-Inverse- Gaussian or Generalized-Hyperbolic margins. A non-pairwise calibration to a portfolio of ten US daily stock returns over the period 2009-2013 shows that fit of the Hyperbolic specification is very good, in terms of marginal distributions and overall correlation matrix. It succeeds in explaining the return distribution of both long-only and long- short random portfolios better than competing models do. Their tail behavior is very well captured also by the Variance-Gamma specification.
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Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 307.
Length: 35 pages
Date of creation: 2013
Date of revision:
Lévy processes; multivariate subordinators; dependence; correlation; multi- variate asset modelling; multivariate time-changed processes; factor-based time changes.;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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