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Dynamic density forecasts for multivariate asset returns

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  • Arnold Polanski
  • Evarist Stoja

Abstract

We propose a simple and flexible framework for forecasting the joint density of asset returns. The multinormal distribution is augmented with a polynomial in (time-varying) non‐central co‐moments of assets. We estimate the coefficients of the polynomial via the method of moments for a carefully selected set of co‐moments. In an extensive empirical study, we compare the proposed model with a range of other models widely used in the literature. Employing a recently proposed as well as standard techniques to evaluate multivariate forecasts, we conclude that the augmented joint density provides highly accurate forecasts of the ‘negative tail’ of the joint distribution. Copyright (C) 2010 John Wiley & Sons, Ltd.

Suggested Citation

  • Arnold Polanski & Evarist Stoja, 2011. "Dynamic density forecasts for multivariate asset returns," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 30(6), pages 523-540, September.
    • Handle: RePEc:jof:jforec:v:30:y:2011:i:6:p:523-540
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    File URL: http://hdl.handle.net/10.1002/for.1192
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    Cited by:

    1. Su Xu, 2017. "A VaR assuming Student t distribution not significantly different from a VaR assuming normal distribution," Risk Management, Palgrave Macmillan, vol. 19(3), pages 189-201, August.

    More about this item

    Keywords

    forecasting of joint density ; time‐varying higher co‐moments ; method of moments ; multivariate value‐at‐risk ;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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