- CHICAGO: a fast and accurate method for portfilio risk calculation
- Journal of Financial Econometrics
- Volume | Issue number
- 7 | 4
- Pages (from-to)
- Number of pages
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
This paper shows how independent component analysis can be used to estimate the generalized orthogonal GARCH model in a fraction of the time otherwise required. The proposed method is a two-step procedure, separating the estimation of the correlation structure from that of the univariate dynamics, thus facilitating the incorporation of non-Gaussian innovations distributions in a straightforward manner. The generalized hyperbolic distribution provides an excellent parametric description of financial returns data and is used for the univariate fits, but its convolutions, necessary for portfolio risk calculations, are intractable. This restriction is overcome by saddlepoint approximations for the Value at Risk and expected shortfall, which are computationally cheap and retain excellent accuracy far into the tails. It is further shown that the mean-expected shortfall portfolio optimization problem can be solved efficiently in the context of the model. A simulation study and an application to stock returns demonstrate the validity of the procedure.
KEYWORDS: expected shortfall, multivariate GARCH, portfolio optimization, saddlepoint approximation, Value at Risk
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