Financial Innovation (Aug 2024)

A novel robust method for estimating the covariance matrix of financial returns with applications to risk management

  • Arturo Leccadito,
  • Alessandro Staino,
  • Pietro Toscano

DOI
https://doi.org/10.1186/s40854-024-00642-2
Journal volume & issue
Vol. 10, no. 1
pp. 1 – 28

Abstract

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Abstract This study introduces the dynamic Gerber model (DGC) and evaluates its performance in the prediction of Value at Risk (VaR) and Expected Shortfall (ES) compared to alternative parametric, non-parametric and semi-parametric methods for estimating the covariance matrix of returns. Based on ES backtests, the DGC method produces, overall, accurate ES forecasts. Furthermore, we use the Model Confidence Set procedure to identify the superior set of models (SSM). For all the portfolios and VaR/ES confidence levels we consider, the DGC is found to belong to the SSM.

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