Modelling dynamic portfolio risk using risk drivers of elliptical processes
The situation of a limited availability of historical data is frequently encountered in portfolio risk estimation, especially in credit risk estimation. This makes it, for example, difficult to find temporal structures with statistical significance in the data on the single asset level. By contrast, there is often a broader availability of cross-sectional data, i.e., a large number of assets in the portfolio. This paper proposes a stochastic dynamic model which takes this situation into account. The modelling framework is based on multivariate elliptical processes which model portfolio risk via sub-portfolio specific volatility indices called portfolio risk drivers. The dynamics of the risk drivers are modelled by multiplicative error models (MEM) - as introduced by Engle (2002) - or by traditional ARMA models. The model is calibrated to Moody's KMV Credit Monitor asset returns (also known as firm-value returns) given on a monthly basis for 756 listed European companies at 115 time points from 1996 to 2005. This database is used by financial institutions to assess the credit quality of firms. The proposed risk drivers capture the volatility structure of asset returns in different industry sectors. A characteristic temporal structure of the risk drivers, cyclical as well as a seasonal, is found across all industry sectors. In addition, each risk driver exhibits idiosyncratic developments. We also identify correlations between the risk drivers and selected macroeconomic variables. These findings may improve the estimation of risk measures such as the (portfolio) Value at Risk. The proposed methods are general and can be applied to any series of multivariate asset or equity returns in finance and insurance.
|Date of creation:||2007|
|Contact details of provider:|| Postal: Postfach 10 06 02, 60006 Frankfurt|
Phone: 0 69 / 95 66 - 0
Fax: 0 69 / 95 66 30 77
Web page: http://www.bundesbank.de/
More information through EDIRC
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.:
- Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-131, February.
- Engle, Robert F. & Gallo, Giampiero M., 2006.
"A multiple indicators model for volatility using intra-daily data,"
Journal of Econometrics,
Elsevier, vol. 131(1-2), pages 3-27.
- Robert F. Engle & Giampiero M. Gallo, 2003. "A Multiple Indicators Model for Volatility Using Intra-Daily Data," NBER Working Papers 10117, National Bureau of Economic Research, Inc.
- Robert F. Engle & Giampiero M. Gallo, 2003. "A Multiple Indicators Model For Volatility Using Intra-Daily Data," Econometrics Working Papers Archive wp2003_07, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti".
- Antje Berndt & Rohan Douglas & Darrell Duffie & Mark Ferguson, "undated".
"Measuring Default Risk Premia from Default Swap Rates and EDFs,"
GSIA Working Papers
2006-E31, Carnegie Mellon University, Tepper School of Business.
- Antje Berndt & Rohan Douglas & Darrell Duffie & Mark Ferguson & David Schranz, 2005. "Measuring default risk premia from default swap rates and EDFs," BIS Working Papers 173, Bank for International Settlements.
- Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
- Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
- Lopez, Jose A., 2004.
"The empirical relationship between average asset correlation, firm probability of default, and asset size,"
Journal of Financial Intermediation,
Elsevier, vol. 13(2), pages 265-283, April.
- Jose A. Lopez, 2002. "The empirical relationship between average asset correlation, firm probability of default and asset size," Working Paper Series 2002-05, Federal Reserve Bank of San Francisco.
- Benjamin M.A. & Rigby R.A. & Stasinopoulos D.M., 2003. "Generalized Autoregressive Moving Average Models," Journal of the American Statistical Association, American Statistical Association, vol. 98, pages 214-223, January.
- Merton, Robert C, 1974.
"On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,"
Journal of Finance,
American Finance Association, vol. 29(2), pages 449-470, May.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Robert Engle, 2002. "New frontiers for arch models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 425-446.
- Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
- Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Düllmann, Klaus & Scheicher, Martin & Schmieder, Christian, 2007. "Asset correlations and credit portfolio risk: an empirical analysis," Discussion Paper Series 2: Banking and Financial Studies 2007,13, Deutsche Bundesbank, Research Centre.
- Foster, Dean P & Nelson, Daniel B, 1996. "Continuous Record Asymptotics for Rolling Sample Variance Estimators," Econometrica, Econometric Society, vol. 64(1), pages 139-174, January.
- Dean P. Foster & Daniel B. Nelson, 1994. "Continuous Record Asymptotics for Rolling Sample Variance Estimators," NBER Technical Working Papers 0163, National Bureau of Economic Research, Inc.
- Linda Allen & Anthony Saunders, 2003. "A survey of cyclical effects in credit risk measurement model," BIS Working Papers 126, Bank for International Settlements.
- Chou, Ray Yeutien, 2005. "Forecasting Financial Volatilities with Extreme Values: The Conditional Autoregressive Range (CARR) Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 561-582, June.
- Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
- repec:cup:etheor:v:11:y:1995:i:1:p:122-50 is not listed on IDEAS
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:zbw:bubdp2:5608. 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: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.