Prediction of Financial Downside-Risk with Heavy-Tailed Conditional Distributions

23 Pages Posted: 12 May 2003

See all articles by Stefan Mittnik

Stefan Mittnik

University of Kiel - Institute of Statistics & Econometrics; Ludwig Maximilian University of Munich - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Marc S. Paolella

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Date Written: March 2003

Abstract

The use of GARCH models with stable Paretian innovations in financial modeling has been recently suggested in the literature. This class of processes is attractive because it allows for conditional skewness and leptokurtosis of financial returns without ruling out normality. This contribution illustrates their usefulness in predicting the downside risk of financial assets in the context of modeling foreign exchange-rates and demonstrates their superiority over use of normal or Student's t GARCH models.

Keywords: Risk Management, Value at Risk, Density Forecasting, Predictive Likelihood

JEL Classification: C22, C51, G10

Suggested Citation

Mittnik, Stefan and Paolella, Marc S., Prediction of Financial Downside-Risk with Heavy-Tailed Conditional Distributions (March 2003). CFS Working Paper No. 2003/04. Available at SSRN: https://ssrn.com/abstract=391261 or http://dx.doi.org/10.2139/ssrn.391261

Stefan Mittnik (Contact Author)

University of Kiel - Institute of Statistics & Econometrics ( email )

Olshausenstr. 40
Kiel, Schleswig-Holstein 24118
Germany

Ludwig Maximilian University of Munich - Faculty of Economics ( email )

Akademiestr.1/III
Munich, D-80539
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Marc S. Paolella

University of Zurich - Department of Banking and Finance

Plattenstr. 14
Z├╝rich, 8032
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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