Practical Volatility and Correlation Modeling for Financial Market Risk Management

Torben Andersen, Tim Bollerslev, Peter Christoffersen and Francis Diebold

No 11069, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: What do academics have to offer market risk management practitioners in financial institutions? Current industry practice largely follows one of two extremely restrictive approaches: historical simulation or RiskMetrics. In contrast, we favor flexible methods based on recent developments in financial econometrics, which are likely to produce more accurate assessments of market risk. Clearly, the demands of real-world risk management in financial institutions -- in particular, real-time risk tracking in very high-dimensional situations -- impose strict limits on model complexity. Hence we stress parsimonious models that are easily estimated, and we discuss a variety of practical approaches for high-dimensional covariance matrix modeling, along with what we see as some of the pitfalls and problems in current practice. In so doing we hope to encourage further dialog between the academic and practitioner communities, hopefully stimulating the development of improved market risk management technologies that draw on the best of both worlds.

JEL-codes: G1 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-cfn, nep-ecm, nep-ets and nep-fin
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Published as Practical Volatility and Correlation Modeling for Financial Market Risk Management , Torben G. Andersen, Tim Bollerslev, Peter Christoffersen, Francis X. Diebold. in The Risks of Financial Institutions , Carey and Stulz. 2006

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Related works:
Chapter: Practical Volatility and Correlation Modeling for Financial Market Risk Management (2007)
Working Paper: Practical Volatility and Correlation Modeling for Financial Market Risk Management (2005)
Working Paper: Practical volatility and correlation modeling for financial market risk management (2005)
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