Evaluating Portfolio Value-at-Risk using Semi-Parametric GARCH Models

Jeroen Rombouts and Marno Verbeek

No 04-14, Cahiers de recherche from HEC Montréal, Institut d'économie appliquée

Abstract: In this paper we examine the usefulness of multivariate semi-parametric GARCH models for portfolio selection under a Value-at-Risk (VaR) constraint. First, we specify and estimate several alternative multivariate GARCH models for daily returns on the S&P 500 and Nasdaq indexes. Examining the within sample VaRs of a set of given portfolios shows that the semi-parametric model performs uniformly well, while parametric models in several cases have unacceptable failure rates. Interestingly, distributional assumptions appear to have a much larger impact on the performance of the VaR estimates than the particular parametric specification chosen for the GARCH equations. Finally, we examine the economic value of the multivariate GARCH models by determining optimal portfolios based on maximizing expected returns subject to a VaR constraint, over a period of 500 consecutive days. Again, the superiority and robustness of the semi-parametric model is confirmed.

Keywords: multivariate GARCH; semi-parametric estimation; Value-at-Risk; asset allocation. (search for similar items in EconPapers)
Pages: 30 pages
Date: 2004-12
New Economics Papers: this item is included in nep-ets, nep-fin and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Evaluating portfolio Value-at-Risk using semi-parametric GARCH models (2009)
Working Paper: Evaluating portfolio value-at-risk using semi-parametric GARCH models (2009)
Working Paper: Evaluating Portfolio Value-At-Risk Using Semi-Parametric GARCH Models (2009)
Working Paper: Evaluating Portfolio Value-at-Risk using Semi-Parametric GARCH Models (2005)
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