A multivariate functional gradient descent technique to improve Value-at-Risk computation in equity markets

A multivariate functional gradient descent technique to improve Value-at-Risk computation in equity markets

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Article ID: iaor20071169
Country: Germany
Volume: 2
Issue: 2
Start Page Number: 87
End Page Number: 106
Publication Date: Mar 2005
Journal: Computational Management Science
Authors: ,
Keywords: Value at risk
Abstract:

It is difficult to compute Value-at-Risk (VaR) using multivariate models able to take into account the dependence structure between large numbers of assets and being still computationally feasible. A possible procedure is based on functional gradient descent (FGD) estimation for the volatility matrix in connection with asset historical simulation. Backtest analysis on simulated and real data provides strong empirical evidence of the better predictive ability of the proposed procedure over classical filtered historical simulation, with a resulting significant improvement in the measurement of risk.

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