A multivariate semi-parametric portfolio risk optimization and forecasting framework

Storti, Giuseppe and Wang, Chao (2022): A multivariate semi-parametric portfolio risk optimization and forecasting framework.

Abstract

A new multivariate semi-parametric risk forecasting framework is proposed, to enable the portfolio Value-at-Risk (VaR) and Expected Shortfall (ES) optimization and forecasting. The proposed framework accounts for the dependence structure among asset returns, without assuming their distribution. A simulation study is conducted to evaluate the finite sample properties of the employed estimator for the proposed model. An empirically motivated portfolio optimization method, that can be utilized to optimize the portfolio VaR and ES, is developed. A forecasting study on 2.5% level evaluates the performance of the model in risk forecasting and portfolio optimization, based on the components of the Dow Jones index for the out-of-sample period from December 2016 to September 2021. Comparing to the standard models in the literature, the empirical results are favorable for the proposed model class, in particular the effectiveness of the proposed framework in portfolio risk optimization is demonstrated.

• Item Type: MPRA Paper
• Language: English
• Keywords: semi-parametric; Value-at-Risk; Expected Shortfall; multivariate; portfolio optimization.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation

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