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Comparing univariate and multivariate models to forecast portfolio value-at-risk

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Author Info

  • Andre A. P.

    ()

  • Francisco J. Nogales

    ()

  • Esther Ruiz

    ()

Abstract

This article addresses the problem of forecasting portfolio value-at-risk (VaR) with multivariate GARCH models vis-à-vis univariate models. Existing literature has tried to answer this question by analyzing only small portfolios and using a testing framework not appropriate for ranking VaR models. In this work we provide a more comprehensive look at the problem of portfolio VaR forecasting by using more appropriate statistical tests of comparative predictive ability. Moreover, we compare univariate vs. multivariate VaR models in the context of diversified portfolios containing a large number of assets and also provide evidence based on Monte Carlo experiments. We conclude that, if the sample size is moderately large, multivariate models outperform univariate counterparts on an out-of-sample basis.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Estadística y Econometría in its series Statistics and Econometrics Working Papers with number ws097222.

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Date of creation: Nov 2009
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Handle: RePEc:cte:wsrepe:ws097222

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Keywords: Market risk; Backtesting; Conditional predictive ability; GARCH; Volatility; Capital requirements; Basel II;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Multivariate Versus Univariate Forecasts – Which is Best for Forecasting?
    by Clive Jones in Business Forecasting on 2013-06-10 15:57:40
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Cited by:
  1. Kris Boudt & Sébastien Laurent & Asger Lunde & Rogier Quaedvlieg, 2014. "Positive Semidefinite Integrated Covariance Estimation, Factorizations and Asynchronicity," CREATES Research Papers 2014-05, School of Economics and Management, University of Aarhus.
  2. Fuertes, Ana-Maria & Olmo, Jose, 2013. "Optimally harnessing inter-day and intra-day information for daily value-at-risk prediction," International Journal of Forecasting, Elsevier, vol. 29(1), pages 28-42.
  3. Santos, André A.P. & Nogales, Francisco J. & Ruiz, Esther & Dijk, Dick Van, 2012. "Optimal portfolios with minimum capital requirements," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1928-1942.
  4. Anne Opschoor & Dick van Dijk & Michel van der Wel, 2013. "Predicting Covariance Matrices with Financial Conditions Indexes," Tinbergen Institute Discussion Papers 13-113/III, Tinbergen Institute.
  5. Jochen Krause & Marc S. Paolella, 2014. "A Fast, Accurate Method for Value-at-Risk and Expected Shortfall," Econometrics, MDPI, Open Access Journal, vol. 2(2), pages 98-122, June.

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