Modelling Time-Varying Downside Risk
The Icfai University Journal of Financial Economics, Vol. 7, No. 1, March 2009
23 Pages Posted: 7 Aug 2008 Last revised: 14 Jun 2009
Date Written: December 1, 2008
Abstract
This paper estimates time-varying systematic downside risk using a parametric specification (BEKK model) and a nonparametric procedure (rolling window technique). A sample of Malaysian industry portfolio daily returns reveals that the covariance between portfolio excess returns and excess downside market returns is persistent and there is a significant difference between the average downside risk estimated in the BEKK model and in the rolling window technique. When the downside risk estimated in the BEKK model is smoothed using moving averages, a positive association between the smoothed series and the downside risk estimated in the rolling window technique is observed. This association gets stronger as the smoothing interval gets closer to the length of the rolling window.
Keywords: Conditional covariance, time-varying downside risk, downside market
JEL Classification: G12, G13, C51
Suggested Citation: Suggested Citation
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