Stable mixture GARCH models

Simon Broda, Markus Haas, Jochen Krause, Marc S. Paolella and Sven C. Steude

Journal of Econometrics, 2013, vol. 172, issue 2, 292-306

Abstract: A new model class for univariate asset returns is proposed which involves the use of mixtures of stable Paretian distributions, and readily lends itself to use in a multivariate context for portfolio selection. The model nests numerous ones currently in use, and is shown to outperform all its special cases. In particular, an extensive out-of-sample risk forecasting exercise for seven major FX and equity indices confirms the superiority of the general model compared to its special cases and other competitors. Estimation issues related to problems associated with mixture models are discussed, and a new, general, method is proposed to successfully circumvent these. The model is straightforwardly extended to the multivariate setting by using an independent component analysis framework. The tractability of the relevant characteristic function then facilitates portfolio optimization using expected shortfall as the downside risk measure.

Keywords: Density forecasting; Expected shortfall; Fat tails; ICA; GARCH; Mixtures; Portfolio selection; Stable Paretian distribution; Value-at-risk (search for similar items in EconPapers)
JEL-codes: C13 C16 C22 C32 G17 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Related works:
Working Paper: Stable Mixture GARCH Models (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:172:y:2013:i:2:p:292-306

DOI: 10.1016/j.jeconom.2012.08.012

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