Multivariate semi-nonparametric distributions with dynamic conditional correlations |
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| Authors: | Esther B Del Brio Javier Perote |
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| Institution: | a Department of Business and Finance, University of Salamanca, 37007 Salamanca, Spainb Department of Economics and Quantitative Methods, Westminster Business School, University of Westminster, London NW1 5LS, UKc Department of Economics, University of Salamanca, 37007 Salamanca, Spain |
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| Abstract: | This paper generalizes the Dynamic Conditional Correlation (DCC) model of Engle (2002), incorporating a flexible non-Gaussian distribution based on Gram-Charlier expansions. The resulting semi-nonparametric-DCC (SNP-DCC) model allows estimation in two stages and deals with the negativity problem which is inherent in truncated SNP densities. We test the performance of a SNP-DCC model with respect to the (Gaussian)-DCC through an empirical application of density forecasting for portfolio returns. Our results show that the proposed multivariate model provides a better in-sample fit and forecast of the portfolio returns distribution, and thus is useful for financial risk forecasting and evaluation. |
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| Keywords: | Density forecasts Financial markets GARCH models Multivariate time series Semi-nonparametric methods |
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