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Copula based multivariate semi-Markov models with applications in high-frequency finance

D’Amico, Guglielmo and Filippo Petroni

European Journal of Operational Research, 2018, vol. 267, issue 2, 765-777

Abstract: We introduce a new multivariate model of multiple asset returns. Our model is based on weighted indexed semi-Markov chains to describe the single (marginals) asset returns, whereas the dependence structure among the considered assets is described by introducing copula functions. A real application of the proposed multivariate model is presented based on the evolution of 6 stocks from the Italian Stock Exchange. We provide empirical evidence that the model is able to correctly reproduce statistical regularities of multivariate real data such as the cross-correlation function, value-at-risk, marginal value-at-risk and conditional value-at-risk. The model is also used for volatility forecasting of each stock.

Keywords: Finance; Stochastic processes; Applied probability; Portfolio analysis (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:ejores:v:267:y:2018:i:2:p:765-777