Forecasting liquidity-adjusted intraday Value-at-Risk with vine copulas

Gregor N.F. Weiß and Hendrik Supper

Journal of Banking & Finance, 2013, vol. 37, issue 9, 3334-3350

Abstract: We propose to model the joint distribution of bid-ask spreads and log returns of a stock portfolio by using Autoregressive Conditional Double Poisson and GARCH processes for the marginals and vine copulas for the dependence structure. By estimating the joint multivariate distribution of both returns and bid-ask spreads from intraday data, we incorporate the measurement of commonalities in liquidity and comovements of stocks and bid-ask spreads into the forecasting of three types of liquidity-adjusted intraday Value-at-Risk (L-IVaR). In a preliminary analysis, we document strong extreme comovements in liquidity and strong tail dependence between bid-ask spreads and log returns across the firms in our sample thus motivating our use of a vine copula model. Furthermore, the backtesting results for the L-IVaR of a portfolio consisting of five stocks listed on the NASDAQ show that the proposed models perform well in forecasting liquidity-adjusted intraday portfolio profits and losses.

Keywords: Liquidity; Commonality; Vine copulas; Liquidity-adjusted intraday Value-at-Risk (search for similar items in EconPapers)
JEL-codes: C53 C58 G12 G14 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:9:p:3334-3350

DOI: 10.1016/j.jbankfin.2013.05.013

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