Business Cycles and Portfolio Tail Risk Forecasting

58 Pages Posted: 7 Dec 2022

See all articles by Qing (Clara) Zhou

Qing (Clara) Zhou

Macquarie University

Lei Jiao

affiliation not provided to SSRN

Robert W. Faff

University of Queensland; Bond University

Yin Liao

Macquarie University - Department of Applied Finance and Actuarial Studies; Australian National University - The Centre for Applied Macroeconomic Analysis (CAMA)

Abstract

We propose a new 3-step resampling approach to forecast portfolio tail risk conditional on the economic state. The approach first predicts economic states using a set of macroeconomic and financial variables. We then forecast the joint distribution of multiple assets in the portfolio according to the forecasted economic states. Finally, we calculate portfolio tail risk measures using the forecasted joint return distribution. This approach favorably accounts for time variation in the higher co-moments of the joint distribution of the returns of assets in the portfolio, and is applicable to large-scale portfolios. In an out-of-sample forecasting analysis, the new approach outperforms a set of widely-used existing models for portfolio tail risk forecasting.

Keywords: business cycle, joint distribution of component assets, higher co-moments, portfolio tail risk, large-dimensional portfolios, out-of-sample forecasts

Suggested Citation

Zhou, Qing (Clara) and Jiao, Lei and Faff, Robert W. and Liao, Yin, Business Cycles and Portfolio Tail Risk Forecasting. Available at SSRN: https://ssrn.com/abstract=4295618 or http://dx.doi.org/10.2139/ssrn.4295618

Qing (Clara) Zhou (Contact Author)

Macquarie University ( email )

Lei Jiao

affiliation not provided to SSRN ( email )

No Address Available

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Bond University ( email )

Gold Coast, QLD 4229
Australia

Yin Liao

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
United States

Australian National University - The Centre for Applied Macroeconomic Analysis (CAMA) ( email )

Canberra, Australian Capital Territory 2601
Australia

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