Modeling fat tails in stock returns: a multivariate stable-GARCH approach
In this paper a new multivariate volatility model is proposed. It combines the appealing properties of the stable Paretian distribution to model the heavy tails with the GARCH model to capture the volatility clustering. Returns on assets are assumed to follow a sub-Gaussian distribution, which is a particular multivariate stable distribution. In this way the characteristic function of the fitted returns has a tractable expression and the density function can be recovered by numerical methods. A multivariate GARCH structure is then adopted to model the covariance matrix of the Gaussian vectors underlying the sub-Gaussian system. The model is applied to a bivariate series of daily U.S. stock returns. Value-at-risk for long and short positions is computed and compared with the one obtained using the multivariate normal and the multivariate Student’s t distribution. Finally, exploiting the recent developments in the vast dimensional time-varying covariances modeling, possible feasible extensions of our model to higher dimensions are suggested and an illustrative example using the Dow Jones index components is presented. Copyright Springer-Verlag 2012
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 27 (2012)
Issue (Month): 3 (September)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/statistics/journal/180/PS2|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Benoit Mandelbrot, 2015.
"The Variation of Certain Speculative Prices,"
World Scientific Book Chapters,
in: THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78
World Scientific Publishing Co. Pte. Ltd..
- Lombardi, Marco J. & Veredas, David, 2009.
"Indirect estimation of elliptical stable distributions,"
Computational Statistics & Data Analysis,
Elsevier, vol. 53(6), pages 2309-2324, April.
- LOMBARDI, Marco & VEREDAS, David, 2007. "Indirect estimation of elliptical stable distributions," CORE Discussion Papers 2007018, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Eugene F. Fama, 1965. "Portfolio Analysis in a Stable Paretian Market," Management Science, INFORMS, vol. 11(3), pages 404-419, January.
- Bonato, Matteo, 2011. "Robust estimation of skewness and kurtosis in distributions with infinite higher moments," Finance Research Letters, Elsevier, vol. 8(2), pages 77-87, June.
- Ruiz, Esther & Pascual, Lorenzo, 2002. " Bootstrapping Financial Time Series," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 271-300, July.
- Pierre Giot & Sébastien Laurent, 2003.
"Value-at-risk for long and short trading positions,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 18(6), pages 641-663.
- Pierre Giot and S»bastien Laurent, 2001. "Value-At-Risk For Long And Short Trading Positions," Computing in Economics and Finance 2001 94, Society for Computational Economics.
- GIOT, Pierre & LAURENT, Sébastien, . "Value-at-Risk for long and short trading positions," CORE Discussion Papers RP 1707, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- GIOT, Pierre & LAURENT, Sébastien, 2001. "Value-at-risk for long and short trading positions," CORE Discussion Papers 2001022, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- J. Huston McCulloch, 2003.
"The Risk-Neutral Measure and Option Pricing under Log-Stable Uncertainty,"
03-07, Ohio State University, Department of Economics.
- J. Huston McCulloch, 2004. "The Risk-Neutral Measure and Option Pricing under Log-Stable Uncertainty," Econometric Society 2004 North American Winter Meetings 428, Econometric Society.
- BAUWENS, Luc & LAURENT, Sébastien & ROMBOUTS, Jeroen, 2003.
"Multivariate GARCH models: a survey,"
CORE Discussion Papers
2003031, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Doganoglu, Toker & Hartz, Christoph & Mittnik, Stefan, 2006.
"Portfolio optimization when risk factors are conditionally varying and heavy tailed,"
CFS Working Paper Series
2006/24, Center for Financial Studies (CFS).
- Toker Doganoglu & Christoph Hartz & Stefan Mittnik, 2007. "Portfolio optimization when risk factors are conditionally varying and heavy tailed," Computational Economics, Springer;Society for Computational Economics, vol. 29(3), pages 333-354, May.
- Mittnik, Stefan & Paolella, Marc S. & Rachev, Svetlozar T., 2000. "Diagnosing and treating the fat tails in financial returns data," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 389-416, November.
- GARCIA, René & RENAULT, Eric & VEREDAS, David, 2006.
"Estimation of stable distributions by indirect inference,"
CORE Discussion Papers
2006112, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Garcia, René & Renault, Eric & Veredas, David, 2011. "Estimation of stable distributions by indirect inference," Journal of Econometrics, Elsevier, vol. 161(2), pages 325-337, April.
- Neil Shephard & Kevin Sheppard & Robert F. Engle, 2008.
"Fitting vast dimensional time-varying covariance models,"
Economics Series Working Papers
403, University of Oxford, Department of Economics.
- Robert Engle & Neil Shephard & Kevin Shepphard, 2008. "Fitting vast dimensional time-varying covariance models," OFRC Working Papers Series 2008fe30, Oxford Financial Research Centre.
- Sentana,E., 1995.
"Quadratic Arch Models,"
9517, Centro de Estudios Monetarios Y Financieros-.
- Kim, Tae-Hwan & White, Halbert, 2004. "On more robust estimation of skewness and kurtosis," Finance Research Letters, Elsevier, vol. 1(1), pages 56-73, March.
When requesting a correction, please mention this item's handle: RePEc:spr:compst:v:27:y:2012:i:3:p:499-521. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.