Stable Mixture GARCH Models

Simon Broda, Markus Haas, Jochen Krause, Marc S. Paolella and Sven C. Steude
Additional contact information
Jochen Krause: University of Zurich
Marc S. Paolella: University of Zurich and Swiss Finance Insitute
Sven C. Steude: University of Zurich

No 11-39, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: A new model class for univariate asset returns is proposed which involves the use of mixtures of stable Paretian distributions, and readily lends itself to use in a multivariate context for portfolio selection. The model nests numerous ones currently in use, and is shown to outperform all its special cases. In particular, an extensive out-of-sample risk forecasting exercise for seven major FX and equity indices confirms the superiority of the general model compared to its special cases and other competitors. An improved method (in terms of speed and accuracy) is developed for the computation of the stable Paretian density. Estimation issues related to problems associated with mixture models are discussed, and a new, general, method is proposed to successfully circumvent these. Because of the tractability of the stable Paretian characteristic function, the model is straight forwardly extended to support portfolio selection using expected shortfall as the downside risk measure by using an independent component analysis framework.

Keywords: Density Forecasting; Expected Shortfall; Fat Tails; ICA; GARCH; Mixtures; Portfolio Selection; Stable Paretian Distribution; Value-at-Risk (search for similar items in EconPapers)
JEL-codes: C13 C16 C22 C32 G17 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2011-09
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Stable mixture GARCH models (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1139

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