Practical Volatility and Correlation Modeling for Financial Market Risk Management

41 Pages Posted: 16 Feb 2005 Last revised: 1 Oct 2022

See all articles by Torben G. Andersen

Torben G. Andersen

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

Francis X. Diebold

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 2005

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.

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 2005). NBER Working Paper No. w11069, Available at SSRN: https://ssrn.com/abstract=652988

Torben G. Andersen (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
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National Bureau of Economic Research (NBER) ( email )

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Aarhus University - CREATES ( email )

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Tim Bollerslev

Duke University - Finance ( email )

Durham, NC 27708-0120
United States
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Duke University - Department of Economics

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National Bureau of Economic Research (NBER)

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Peter Christoffersen

University of Toronto - Rotman School of Management ( email )

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Toronto, Ontario M5S 3E6 M5P 3C4
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Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Francis X. Diebold

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1507 (Phone)
215-573-4217 (Fax)

HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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