Journal of Banking & Finance Vol. 72 2016
Multivariate moments expansion density: Application of the dynamic equicorrelation model
Abstract
In this study, we propose a new semi-nonparametric (SNP) density model for describing the density of portfolio returns. This distribution, which we refer to as the multivariate moments expansion (MME), admits any non-Gaussian (multivariate) distribution as its basis because it is specified directly in terms of the basis density’s moments. To obtain the expansion of the Gaussian density, the MME is a reformulation of the multivariate Gram–Charlier (MGC), but the MME is much simpler and tractable than the MGC when positive transformations are used to produce well-defined densities. As an empirical application, we extend the dynamic conditional equicorrelation (DECO) model to an SNP framework using the MME. The resulting model is parameterized in a feasible manner to admit two-stage consistent estimation and it represents the DECO as well as the salient non-Gaussian features of portfolio return distributions. The in- and out-of-sample performance of a MME–DECO model of a portfolio of 10 assets demonstrate that it can be a useful tool for risk management purposes.
- DOI
- 10.1016/j.jbankfin.2015.12.012
- Volume
- 72
- Pages
- S216-S232
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib