Sensitivity analysis of volatility: a new tool for risk management

Vladimiro Ceci, Simone Manganelli and Walter Vecchiato

No 194, Working Paper Series from European Central Bank

Abstract: The extension of GARCH models to the multivariate setting has been fraught with difficulties. In this paper, we suggest to work with univariate portfolio GARCH models. We show how the multivariate dimension of the portfolio allocation problem may be recovered from the univariate approach. The main tool we use is the "variance sensitivity analysis", which measures the change in the portfolio variance as a consequence of an infinitesimal change in the portfolio allocation. We derive the sensitivity of the univariate portfolio GARCH variance to the portfolio weights, by analytically computing the derivatives of the estimated GARCH variance with respect to these weights. We suggest a new and simple method to estimate full variance-covariance matrices of portfolio assets. An application to real data portfolios shows how to implement our methodology and compares its performance against that of selected popular alternatives. JEL Classification: C32, C53, G15

Keywords: Dynamic Correlations; GARCH; risk management; Sensitivity Analysis (search for similar items in EconPapers)
Date: 2002-11
Note: 196912
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp194.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2002194

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().