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Measurement of Common Risk Factors: A Panel Quantile Regression Model for Returns

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  • Frantisek Cech
  • Jozef Barunik

Abstract

This paper investigates how to measure common market risk factors using newly proposed Panel Quantile Regression Model for Returns. By exploring the fact that volatility crosses all quantiles of the return distribution and using penalized fixed effects estimator we are able to control for otherwise unobserved heterogeneity among financial assets. Direct benefits of the proposed approach are revealed in the portfolio Value-at-Risk forecasting application, where our modeling strategy performs significantly better than several benchmark models according to both statistical and economic comparison. In particular Panel Quantile Regression Model for Returns consistently outperforms all the competitors in the 5\% and 10\% quantiles. Sound statistical performance translates directly into economic gains which is demonstrated in the Global Minimum Value-at-Risk Portfolio and Markowitz-like comparison. Overall results of our research are important for correct identification of the sources of systemic risk, and are particularly attractive for high dimensional applications.

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  • Frantisek Cech & Jozef Barunik, 2017. "Measurement of Common Risk Factors: A Panel Quantile Regression Model for Returns," Papers 1708.08622, arXiv.org.
    • Handle: RePEc:arx:papers:1708.08622
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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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