Modelling Time-Varying Downside Risk

The Icfai University Journal of Financial Economics, Vol. 7, No. 1, March 2009

21st Australian Finance and Banking Conference 2008

23 Pages Posted: 7 Aug 2008 Last revised: 14 Jun 2009

See all articles by Don U. A. Galagedera

Don U. A. Galagedera

Monash University - Department of Econometrics and Business Statistics

Asmah M. Mohd Jaapar

Islamic Science University of Malaysia

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

Galagedera, Don (Tissa) U. A. and Jaapar, Asmah M. Mohd, Modelling Time-Varying Downside Risk (December 1, 2008). The Icfai University Journal of Financial Economics, Vol. 7, No. 1, March 2009, 21st Australian Finance and Banking Conference 2008, Available at SSRN: https://ssrn.com/abstract=1209507

Don (Tissa) U. A. Galagedera (Contact Author)

Monash University - Department of Econometrics and Business Statistics ( email )

900 Dandenong Road
Caulfield East, VIC 3145
Australia
+61 3 9903 1578 (Phone)
+61 3 9903 2007 (Fax)

Asmah M. Mohd Jaapar

Islamic Science University of Malaysia ( email )

Nilai, Negeri Sembilan Darul Khusus 71800
Malaysia

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