A Portfolio Index GARCH model |
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Authors: | Manabu Asai Michael McAleer |
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Affiliation: | aFaculty of Economics, Soka University, Japan;bSchool of Economics and Commerce, University of Western Australia, Australia |
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Abstract: | This paper develops the structure of a parsimonious Portfolio Index (PI) GARCH model. Unlike the conventional approach to Portfolio Index returns, which employs the univariate ARCH class, the PI-GARCH approach incorporates the effects on individual assets, leading to a better understanding of portfolio risk management, and achieves greater accuracy in forecasting Value-at-Risk (VaR) thresholds. For various asymmetric GARCH models, a Portfolio Index Composite News Impact Surface (PI-CNIS) is developed to measure the effects of news on the conditional variances. The paper also investigates the finite sample properties of the PI-GARCH model. The empirical example shows that the asymmetric PI-GARCH-t model outperforms the GJR-t model and the filtered historical simulation with a t distribution in forecasting VaR thresholds. |
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Keywords: | Risk management Portfolio Index model Multivariate volatility Asymmetry Composite news Value-at-Risk thresholds Monte Carlo simulations |
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