Dependence Calibration and Portfolio Fit with FactorBased Time Changes

Elisa Luciano, Marina Marena and Patrizia Semeraro

No 307, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: The paper explores the fit properties of a class of multivariate Lévy processes, which are characterized as time-changed correlated Brownian motions. The time-change has a common and an idiosyncratic component, to re ect the properties of trade, which it represents. The resulting process may provide Variance-Gamma, Normal-Inverse- Gaussian or Generalized-Hyperbolic margins. A non-pairwise calibration to a portfolio of ten US daily stock returns over the period 2009-2013 shows that fit of the Hyperbolic specification is very good, in terms of marginal distributions and overall correlation matrix. It succeeds in explaining the return distribution of both long-only and long- short random portfolios better than competing models do. Their tail behavior is well captured also by the Variance-Gamma specification.

Keywords: Lévy processes; multivariate subordinators; dependence; correlation; multi- variate asset modelling; multivariate time-changed processes; factor-based time changes. (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013, Revised 2015
New Economics Papers: this item is included in nep-ets
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:307

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