Market risk modeling with option-implied covariances and score-driven dynamics

Rodrigo Herrera and Marco Piña

The North American Journal of Economics and Finance, 2024, vol. 72, issue C

Abstract: In this paper we make use of option-implied volatilities to build a time-varying implied correlation matrix. Then, we use this matrix to estimate jointly both the covariance matrix of the returns and the implied covariance matrix dynamics. Finally, we do a backtest and show that the proposed model can effectively use the risk-neutral information to model the variance of the returns and to forecast the Value-at-Risk. Our results show that, in general, the proposed model outperforms the benchmark while considerably reducing the number of parameters to be estimated.

Keywords: Multivariate volatility model; Option-implied volatility; Forecasting; Value-at-risk (search for similar items in EconPapers)
JEL-codes: C53 C58 G17 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062940824000615
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:72:y:2024:i:c:s1062940824000615

DOI: 10.1016/j.najef.2024.102136

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().