Efficient Evaluation of Multidimensional Time-Varying Density Forecasts with an Application to Risk Management

Evarist Stoja and Arnold Polanski ()

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: We propose two simple evaluation methods for time varying density forecasts of continuous higher dimensional random variables. Both methods are based on the probability integral transformation for unidimensional forecasts. The first method tests multinormal densities and relies on the rotation of the coordinate system. The advantage of the second method is not only its applicability to any continuous distribution but also the evaluation of the forecast accuracy in specific regions of its domain as defined by the user’s interest. We show that the latter property is particularly useful for evaluating a multidimensional generalization of the Value at Risk. In simulations and in an empirical study, we examine the performance of both tests.

Keywords: Multivariate Density Forecast Evaluation; Probability Integral Transformation; Multidimensional Value at Risk; Monte Carlo Simulations (search for similar items in EconPapers)
JEL-codes: C52 C53 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2009-12
New Economics Papers: this item is included in nep-ban, nep-ecm, nep-for, nep-ore and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:bri:uobdis:09/617

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