Modeling asset returns under time-varying semi-nonparametric distributions

Ángel León and Trino Ñíguez Grau

Journal of Banking & Finance, 2020, vol. 118, issue C

Abstract: We extend the semi-nonparametric (SNP) density of León et al. (2009) to time-varying higher-order moments for daily asset return innovations of stock indexes and foreign-exchange rates. We estimate robust tail-indexes for testing the existence of the unconditional higher-order moments. We obtain closed-form expressions of partial moments and expected shortfall under the time-varying SNP density with the GJR-GARCH for modeling returns. A comparative study between SNP and Hansen’s skewed-t, based on skewness-kurtosis frontiers, in-sample and backtesting analyses, is also implemented. Finally, we conduct an out-of-sample portfolio selection exercise for the stocks of the S&P 100 index through an equity screening method based on our parametric one-sided reward/risk performance measures and compare with the Sharpe ratio portfolio.

Keywords: Backtesting; Equity screening; Expected shortfall; Conditional higher-order moments; Tail-index (search for similar items in EconPapers)
JEL-codes: C22 G11 G17 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:118:y:2020:i:c:s0378426620301369

DOI: 10.1016/j.jbankfin.2020.105870

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