Forecasting Liquidity-Adjusted Intraday Value-at-Risk with Vine Copulas

48 Pages Posted: 2 Mar 2012 Last revised: 14 Jun 2013

See all articles by Gregor N. F. Weiss

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Hendrik Supper

University of Dortmund - Department of Business

Date Written: April 29, 2013

Abstract

We propose to model the joint distribution of bid-ask spreads and log returns of a stock portfolio by using Autoregressive Conditional Double Poisson and GARCH processes for the marginals and vine copulas for the dependence structure. By estimating the joint multivariate distribution of both returns and bid-ask spreads from intraday data, we incorporate the measurement of commonalities in liquidity and comovements of stocks and bid-ask spreads into the forecasting of three types of liquidity-adjusted intraday Value-at-Risk (L-IVaR). In a preliminary analysis, we document strong extreme comovements in liquidity and strong tail dependence between bid-ask spreads and log returns across the firms in our sample thus motivating our use of a vine copula model. Furthermore, the backtesting results for the L-IVaR of a portfolio consisting of five stocks listed on the NASDAQ show that the proposed models perform well in forecasting liquidity-adjusted intraday portfolio profits and losses.

Keywords: Liquidity, Commonality, Vine Copulas, liquidity-adjusted intraday, Value-at-Risk

JEL Classification: C58, C53, G12, G14

Suggested Citation

Weiss, Gregor N. F. and Supper, Hendrik, Forecasting Liquidity-Adjusted Intraday Value-at-Risk with Vine Copulas (April 29, 2013). Journal of Banking & Finance, Volume 37, Issue 9, pp. 3334-3350, September 2013, Available at SSRN: https://ssrn.com/abstract=2013203 or http://dx.doi.org/10.2139/ssrn.2013203

Gregor N. F. Weiss (Contact Author)

University of Leipzig - Faculty of Economics and Management Science ( email )

Grimmaische Str. 12
Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/nfdl

Hendrik Supper

University of Dortmund - Department of Business ( email )

Otto-Hahn-Str. 6a
Dortmund, 44227
Germany

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