Classifying Italian Pension Funds via GARCH Distance

Abstract:     
The adoption of pension funds in the Italian social security policy has increased the offer of several investment funds. Workers have to decide what kind of investment to perform, the funds having a different composition and a subsequently different degree of risk. In this paper we propose the use of a distance between GARCH models as a measure of different structure of volatility of some funds, with the purpose of classifying a set of funds. Furthermore we extend the idea of equivalence between ARMA models to the GARCH case to verify the equality of the risk of each couple of funds. An application on thirteen Italian funds and fund indices is performed.

Keywords: Agglomerative algorithm, Cluster analysis, GARCH models, Pension funds, Risk profile

JEL Classification: C22, G23

Accepted Paper Series