Dependence Calibration and Portfolio Fit with Factor-based Time Changes

Carlo Alberto Notebooks No. 307, October 2013

35 Pages Posted: 14 Jun 2014

See all articles by Elisa Luciano

Elisa Luciano

Collegio Carlo Alberto; University of Turin - Department of Statistics and Applied Mathematics

Marina Marena

University of Eastern Piedmont

Patrizia Semeraro

Politecnico of Turin

Date Written: June 13, 2014

Abstract

The paper explores the fit properties of a class of multivariate Lévy processes, which are characterized as time-changed correlated Brownian motions. The time-change has a common and an idiosyncratic component, to reflect the properties of trade, which it represents. The resulting process may provide Variance-Gamma, Normal-Inverse-Gaussian or Generalized-Hyperbolic margins. A non-pairwise calibration to a portfolio of ten US daily stock returns over the period 2009-2013 shows that fit of the Hyperbolic specification is very good, in terms of marginal distributions and overall correlation matrix. It succeeds in explaining the return distribution of both long-only and long-short random portfolios better than competing models do. Their tail behavior is very well captured also by the Variance-Gamma specification.

Keywords: Lévy processes, multivariate subordinators, dependence, correlation, multivariate asset modelling, multivariate time-changed processes, factor-based time changes

JEL Classification: G12, G13

Suggested Citation

Luciano, Elisa and Marena, Marina and Semeraro, Patrizia, Dependence Calibration and Portfolio Fit with Factor-based Time Changes (June 13, 2014). Carlo Alberto Notebooks No. 307, October 2013, Available at SSRN: https://ssrn.com/abstract=2449992 or http://dx.doi.org/10.2139/ssrn.2449992

Elisa Luciano

Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

HOME PAGE: http://www.carloalberto.org/people/faculty/fellows/luciano/

University of Turin - Department of Statistics and Applied Mathematics ( email )

Corso Unione Sovietica 218 bis
Turin, I-10122
Italy
+ 39 011 6705230 (Phone)

Marina Marena

University of Eastern Piedmont ( email )

Corso Borsalino 50
Department of Economics and Quantitative Methods
15100 Alessandria
Italy
+39 011 6706275 (Phone)

Patrizia Semeraro (Contact Author)

Politecnico of Turin ( email )

Torino, Turin - Piedmont 10100
Italy

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