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Independent Factor Autoregressive Conditional Density Model

  • Alexios Ghalanos

    ()

    (Faculty of Finance, Cass Business School)

  • Eduardo Rossi

    ()

    (Department of Economics and Management, University of Pavia)

  • Giovanni Urga

    ()

    (Faculty of Finance, Cass Business School and University of Bergamo)

In this paper, we propose a novel Independent Factor Autoregressive Conditional Density (IFACD) model able to generate time-varying higher moments using an independent factor setup. Our proposed framework incorporates dynamic estimation of higher comovements and feasible portfolio representation within a non elliptical multivariate distribution. We report an empirical application, using returns data from 14 MSCI equity index iShares for the period 1996 to 2011, and we show that the IFACD model provides superior VaR forecasts and portfolio allocations with respect to the CHICAGO and DCC models.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0021.pdf
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Paper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 021.

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Length: 28 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:pav:demwpp:021
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