VaR-implied tail-correlation matrices

Stefan Mittnik

Economics Letters, 2014, vol. 122, issue 1, 69-73

Abstract: Empirical evidence suggests that asset returns correlate more strongly in bear markets than conventional correlation estimates imply. We propose a method for determining complete tail-correlation matrices based on Value-at-Risk (VaR) estimates. We demonstrate how to obtain more efficient tail-correlation estimates by use of overidentification strategies and how to guarantee positive semidefiniteness, a property required for valid risk aggregation and Markowitz-type portfolio optimization. An empirical application to a 30-asset universe illustrates the practical applicability and relevance of the approach in portfolio management.

Keywords: Downside risk; Estimation efficiency; Portfolio optimization; Positive semidefiniteness; Solvency II; Value-at-Risk (search for similar items in EconPapers)
JEL-codes: C1 G11 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:122:y:2014:i:1:p:69-73

DOI: 10.1016/j.econlet.2013.10.025

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