Risk modeling with option-implied correlations and score-driven dynamics

Marco Piña and Rodrigo Herrera

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: In this paper we make use of option-implied volatilities to build a time-varying implied correlation matrix. Then, we use this matrix to estimate jointly both the covariance matrix of the returns and the implied covariance matrix dynamics. Finally, we do a backtest and show that the proposed model can effectively use the risk-neutral information to model the variance of the returns and to forecast the Value-at-Risk. Our results show that the model obtains results comparable to the benchmark while considerably reducing the number of estimated parameters.

Date: 2021-11
New Economics Papers: this item is included in nep-ecm and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:932

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