CHICAGO: A Fast and Accurate Method for Portfolio Risk Calculation

Simon Broda and Marc S. Paolella
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Marc S. Paolella: University of Zurich, Swiss Banking Institute

No 08-08, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The estimation of multivariate GARCH models remains a challenging task, even in modern computer environments. This manuscript shows how Independent Component Analysis can be used to estimate the Generalized Orthogonal GARCH model in a fraction of the time otherwise required. The proposed method is a two-step procedure, separating the estimation of the correlation structure from that of the univariate dynamics, thus facilitating the incorporation of non-Gaussian innovations distributions in a straightforward manner. The generalized hyperbolic distribution provides an excellent parametric description of financial returns data and is used for the univariate fits, but its convolutions, necessary for portfolio risk calculations, are intractable. This restriction is overcome by a saddlepoint approximation to the required distribution function, which is computationally cheap and extremely accurate most notably in the tail, which is crucial for risk calculations. A simulation study and an application to stock returns demonstrate the validity of the procedure.

Keywords: Empirical Finance; Saddlepoint Approximation; Value at Risk (search for similar items in EconPapers)
JEL-codes: C13 C16 C32 G11 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2008-02
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Citations: View citations in EconPapers (1)

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http://ssrn.com/abstract=1126706 (application/pdf)

Related works:
Journal Article: CHICAGO: A Fast and Accurate Method for Portfolio Risk Calculation (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0808

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