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Continuous Time Wishart Process for Stochastic Risk

Risks are usually represented and measured by volatility-covolatility matrices. Wishart processes are models for a dynamic analysis of multivariate risk and describe the evolution of stochastic volatility-covolatility matrices, constrained to be symmetric positive definite. The autoregressive Wishart process (WAR) is the multivariate extension of the Cox, Ingersoll, Ross (CIR) process introduced for scalar stochastic volatility. As a CIR process it allows for closed-form solutions for a number of financial problems, such as term structure of T-bonds and corporate bonds, derivative pricing in a multivariate stochastic volatility model, and the structural model for credit risk. Moreover, the Wishart dynamics are very flexible and are serious competitors for less structural multivariate ARCH models.

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Article provided by Taylor & Francis Journals in its journal Econometric Reviews.

Volume (Year): 25 (2006)
Issue (Month): 2-3 ()
Pages: 177-217

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Handle: RePEc:taf:emetrv:v:25:y:2006:i:2-3:p:177-217
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