Forecasting Value-at-Risk Using Block Structure Multivariate Stochastic Volatility Models

Michael McAleer, Manabu Asai and Massimiliano Caporin

No 812, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: Most multivariate variance or volatility models suffer from a common problem, the “curse of dimensionality†. For this reason, most are fitted under strong parametric restrictions that reduce the interpretation and flexibility of the models. Recently, the literature has focused on multivariate models with milder restrictions, whose purpose was to combine the need for interpretability and efficiency faced by model users with the computational problems that may emerge when the number of assets is quite large. We contribute to this strand of the literature proposing a block-type parameterization for multivariate stochastic volatility models. The empirical analysis on stock returns on US market shows that 1% and 5 % Value-at-Risk thresholds based on one-step-ahead forecasts of covariances by the new specification are satisfactory for the period includes the global financial crisis.

Keywords: block structures; multivariate stochastic volatility; curse of dimensionality; leverage effects; multi-factors; heavy-tailed distribution. (search for similar items in EconPapers)
JEL-codes: C10 C32 C51 (search for similar items in EconPapers)
Date: 2012-04
New Economics Papers: this item is included in nep-ets, nep-for, nep-ore and nep-rmg
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http://www.kier.kyoto-u.ac.jp/DP/DP812.pdf (application/pdf)

Related works:
Journal Article: Forecasting Value-at-Risk using block structure multivariate stochastic volatility models (2015)
Working Paper: Forecasting Value-at-Risk using Block Structure Multivariate Stochastic Volatility Models (2013)
Working Paper: Forecasting Value-at-Risk Using Block Structure Multivariate Stochastic Volatility Models (2012)
Working Paper: Forecasting Value-at-Risk Using Block Structure Multivariate Stochastic Volatility Models (2012)
Working Paper: Forecasting Value-at-Risk Using Block Structure Multivariate Stochastic Volatility Models (2012)
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