Forecasting the Risk of Speculative Assets by Means of Copula Distributions

39 Pages Posted: 28 Mar 2013

See all articles by Benjamin Beckers

Benjamin Beckers

German Institute for Economic Research (DIW Berlin)

Helmut Herwartz

University of Goettingen (Gottingen)

Moritz Seidel

Deutsche Bundesbank

Date Written: March 1, 2013

Abstract

The GARCH(1,1) model and its extensions have become a standard econometric tool for modeling volatility dynamics of financial returns and portfolio risk. In this paper, we propose an adjustment of GARCH implied conditional value-at-risk and expected shortfall forecasts that exploits the predictive content of uncorrelated, yet dependent model innovations. The adjustment is motivated by non-Gaussian characteristics of model residuals, and is implemented in a semiparametric fashion by means of conditional moments of simulated bivariate standardized copula distributions. We conduct in-sample forecasting comparisons for a set of 18 stock market indices. In total, four competing copula-GARCH models are contrasted against each other on the basis of their one-step ahead forecasting performance. With regard to forecast unbiasedness and precision, especially the Frank-GARCH models provide most conservative risk forecasts and out-perform all rival models.

Keywords: copula distributions, expected shortfall, GARCH, model selection, non-Gaussian innovations, risk forecasting, value-at-risk

JEL Classification: C22, C51, C52, C53, G32

Suggested Citation

Beckers, Benjamin and Herwartz, Helmut and Seidel, Moritz, Forecasting the Risk of Speculative Assets by Means of Copula Distributions (March 1, 2013). DIW Berlin Discussion Paper No. 1282. Available at SSRN: https://ssrn.com/abstract=2239740 or http://dx.doi.org/10.2139/ssrn.2239740

Benjamin Beckers (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Helmut Herwartz

University of Goettingen (Gottingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Moritz Seidel

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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