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Multivariate moments expansion density: application of the dynamic equicorrelation model

Author

Listed:
  • Trino-Manuel Ñíguez

    (Banco de España)

  • Javier Perote

    () (Universidad de Salamanca)

Abstract

In this study, we propose a new semi-nonparametric (SNP) density model for describing the density of portfolio returns. This distribution, which we refer to as the multivariate moments expansion (MME), admits any non-Gaussian (multivariate) distribution as its basis because it is specified directly in terms of the basis density s moments. To obtain the expansion of the Gaussian density, the MME is a reformulation of the multivariate Gram-Charlier (MGC), but the MME is much simpler and tractable than the MGC when positive transformations are used to produce well-defined densities. As an empirical application, we extend the dynamic conditional equicorrelation (DECO) model to an SNP framework using the MME. The resulting model is parameterized in a feasible manner to admit two-stage consistent estimation, and it represents the DECO as well as the salient non-Gaussian features of portfolio return distributions. The in- and out-of-sample performance of a MME-DECO model of a portfolio of 10 assets demonstrates that it can be a useful tool for risk management purposes.

Suggested Citation

  • Trino-Manuel Ñíguez & Javier Perote, 2016. "Multivariate moments expansion density: application of the dynamic equicorrelation model," Working Papers 1602, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1602
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    References listed on IDEAS

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    1. repec:eee:ecofin:v:42:y:2017:i:c:p:53-69 is not listed on IDEAS
    2. repec:spr:comaot:v:23:y:2017:i:3:d:10.1007_s10588-016-9231-3 is not listed on IDEAS
    3. repec:eee:ememar:v:31:y:2017:i:c:p:96-115 is not listed on IDEAS
    4. Andrés Mora-Valencia & Trino-Manuel Ñíguez & Javier Perote, 2017. "Multivariate approximations to portfolio return distribution," Computational and Mathematical Organization Theory, Springer, vol. 23(3), pages 347-361, September.

    More about this item

    Keywords

    density forecasting; dynamic equicorrelation; Gram-Charlier series; multivariate GARCH; semi-nonparametric method;

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • G1 - Financial Economics - - General Financial Markets

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