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ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München >
CESifo Working Papers, CESifo Group Munich >
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http://hdl.handle.net/10419/38988
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| Title: | | Conditional volatility and correlations of weekly returns and the VaR analysis of 2008 stock market crash  |
| Authors: | | Pesaran, Bahram Pesaran, Mohammad Hashem |
| Issue Date: | | 2010 |
| Series/Report no.: | | CESifo working paper Empirical and Theoretical Methods 3023 |
| Abstract: | | Modelling of conditional volatilities and correlations across asset returns is an integral part of portfolio decision making and risk management. Over the past three decades there has been a trend towards increased asset return correlations across markets, a trend which has been accentuated during the recent financial crisis. We shall examine the nature of asset return correlations using weekly returns on futures markets and investigate the extent to which multivariate volatility models proposed in the literature can be used to formally characterize and quantify market risk. In particular, we ask how adequate these models are for modelling market risk at times of financial crisis. In doing so we consider a multivariate t version of the Gaussian dynamic conditional correlation (DCC) model proposed by Engle (2002), and show that the t-DCC model passes the usual diagnostic tests based on probability integral transforms, but fails the value at risk (VaR) based diagnostics when applied to the post 2007 period that includes the recent financial crisis. |
| Subjects: | | volatilities and correlations weekly returns multivariate t financial interdependence VaR diagnostics 2008 stock market crash |
| JEL: | | C51 C52 G11 |
| Document Type: | | Working Paper |
| Appears in Collections: | | CESifo Working Papers, CESifo Group Munich
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