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Stable mixture GARCH models


Broda, Simon; Haas, Markus; Krause, Jochen; Paolella, Marc S; Steude, Sven C (2013). Stable mixture GARCH models. Journal of Econometrics, 172(2):292-306.

Abstract

A new model class for univariate asset returns is proposed which involves the use of mixtures of stable Paretian distributions, and readily lends itself to use in a multivariate context for portfolio selection. The model nests numerous ones currently in use, and is shown to outperform all its special cases. In particular, an extensive out-of-sample risk forecasting exercise for seven major FX and equity indices confirms the superiority of the general model compared to its special cases and other competitors. Estimation issues related to problems associated with mixture models are discussed, and a new, general, method is proposed to successfully circumvent these. The model is straightforwardly extended to the multivariate setting by using an independent component analysis framework. The tractability of the relevant characteristic function then facilitates portfolio optimization using expected shortfall as the downside risk measure.

Abstract

A new model class for univariate asset returns is proposed which involves the use of mixtures of stable Paretian distributions, and readily lends itself to use in a multivariate context for portfolio selection. The model nests numerous ones currently in use, and is shown to outperform all its special cases. In particular, an extensive out-of-sample risk forecasting exercise for seven major FX and equity indices confirms the superiority of the general model compared to its special cases and other competitors. Estimation issues related to problems associated with mixture models are discussed, and a new, general, method is proposed to successfully circumvent these. The model is straightforwardly extended to the multivariate setting by using an independent component analysis framework. The tractability of the relevant characteristic function then facilitates portfolio optimization using expected shortfall as the downside risk measure.

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10 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2013
Deposited On:20 Feb 2012 16:18
Last Modified:05 Apr 2016 15:25
Publisher:Elsevier
ISSN:0304-4076
Publisher DOI:https://doi.org/10.1016/j.jeconom.2012.08.012
Related URLs:http://www.journals.elsevier.com/journal-of-econometrics/
Other Identification Number:merlin-id:4449

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