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Worldwide equity Risk Prediction

David Ardia and Lennart F. Hoogerheide

Cahiers de recherche from CIRPEE

Abstract: Various GARCH models are applied to daily returns of more than 1200 constituents of major stock indices worldwide. The value-at-risk forecast performance is investigated for different markets and industries, considering the test for correct conditional coverage using the false discovery rate (FDR) methodology. For most of the markets and industries we find the same two conclusions. First, an asymmetric GARCH specification is essential when forecasting the 95% value-at-risk. Second, for both the 95% and 99% value-at-risk it is crucial that the innovations’ distribution is fat-tailed (e.g., Student-t or – even better – a non-parametric kernel density estimate). Then we discuss two applications. First, we use normal Entropy Pooling to estimate a market distribution consistent with the CAPM equilibrium, which improves on the “implied returns” a-la-Black and Litterman (1990) and can be used as the starting point for portfolio construction. Second, we use normal Entropy Pooling to process ranking signals for alpha-generation.

Keywords: GARCH; value-at-risk; equity; worldwide; false discovery rate (search for similar items in EconPapers)
JEL-codes: C11 C22 C52 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-for and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1312

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