Portfolio Risk Evaluation: An Approach Based on Dynamic Conditional Correlations Models and Wavelet Multi-Resolution Analysis

R. Khalfaoui (1) , M. Boutahar (2)

1 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille
2 IML - Institut de mathématiques de Luminy

We analyzed the volatility dynamics of three developed markets (U.K., U.S. and Japan), during the period 2003-2011, by comparing the performance of several multivariate volatility models, namely Constant Conditional Correlation (CCC), Dynamic Conditional Correlation (DCC) and consistent DCC (cDCC) models. To evaluate the performance of models we used four statistical loss functions on the daily Value-at-Risk (VaR) estimates of a diversified portfolio in three stock indices: FTSE 100, S&P 500 and Nikkei 225. We based on one-day ahead conditional variance forecasts. To assess the performance of the abovementioned models and to measure risks over different time-scales, we proposed a wavelet-based approach which decomposes a given time series on different time horizons. Wavelet multiresolution analysis and multivariate conditional volatility models are combined for volatility forecasting to measure the comovement between stock market returns and to estimate daily VaR in the time-frequency space. Empirical results shows that the asymmetric cDCC model of Aielli (2008) is the most preferable according to statistical loss functions under raw data. The results also suggest that wavelet-based models increase predictive performance of financial forecasting in low scales according to number of violations and failure probabilities for VaR models.

Mots clés: Dynamic conditional correlations; wavelet decomposition; Value-at-Risk; Stock prices

Domaines: Economies et finances

R. Khalfaoui, M. Boutahar. Portfolio Risk Evaluation: An Approach Based on Dynamic Conditional Correlations Models and Wavelet Multi-Resolution Analysis. 2012. ⟨halshs-00793068⟩