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http://ssrn.com/abstract=651921
 
 

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Practical Volatility and Correlation Modeling for Financial Market Risk Management


Torben G. Andersen


Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); University of Aarhus - CREATES

Tim Bollerslev


Duke University - Finance; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Peter Christoffersen


University of Toronto - Rotman School of Management; Copenhagen Business School; University of Aarhus - CREATES

Francis X. Diebold


University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

January 11, 2005

PIER Working Paper No. 05-007, CFS Working Paper 2005/02

Abstract:     
What do academics have to offer market risk management practitioners in financial institutions? Current industry practice largely follows one of two extremely restrictive approaches: historical simulation or RiskMetrics. In contrast, we favor flexible methods based on recent developments in financial econometrics, which are likely to produce more accurate assessments of market risk. Clearly, the demands of real-world risk management in financial institutions - in particular, real-time risk tracking in very high-dimensional situations - impose strict limits on model complexity. Hence we stress parsimonious models that are easily estimated, and we discuss a variety of practical approaches for high-dimensional covariance matrix modeling, along with what we see as some of the pitfalls and problems in current practice. In so doing we hope to encourage further dialog between the academic and practitioner communities, hopefully stimulating the development of improved market risk management technologies that draw on the best of both worlds.

Number of Pages in PDF File: 41

Keywords: None

JEL Classification: G10

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Date posted: January 21, 2005  

Suggested Citation

Andersen, Torben G. and Bollerslev, Tim and Christoffersen, Peter and Diebold, Francis X., Practical Volatility and Correlation Modeling for Financial Market Risk Management (January 11, 2005). PIER Working Paper No. 05-007, CFS Working Paper 2005/02. Available at SSRN: http://ssrn.com/abstract=651921 or http://dx.doi.org/10.2139/ssrn.651921

Contact Information

Torben G. Andersen
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
University of Aarhus - CREATES ( email )
School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark
Tim Bollerslev
Duke University - Finance ( email )
Durham, NC 27708-0120
United States
919-660-1846 (Phone)
919-684-8974 (Fax)
Duke University - Department of Economics
213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Peter Christoffersen
University of Toronto - Rotman School of Management ( email )
105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)
HOME PAGE: http://www.christoffersen.com
Copenhagen Business School
Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
University of Aarhus - CREATES
School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark
Francis X. Diebold (Contact Author)
University of Pennsylvania - Department of Economics ( email )
160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
United States
215-898-1507 (Phone)
215-573-4217 (Fax)
HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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