Risk spillovers in international equity portfolios

Item Type Journal paper
Abstract

We define risk spillover as the dependence of a given asset variance on the past covariances and variances of other assets. Building on this idea, we propose the use of a highly flexible and tractable model to forecast the volatility of an international equity portfolio. According to the risk management strategy proposed, portfolio risk is seen as a specific combination of daily realized variances and covariances extracted froma high frequency dataset, which includes equities and currencies. In this framework, we focus on the risk spillovers across equities within the same sector (sector spillover), and fromcurrencies to international
equities (currency spillover). We compare these specific risk spillovers to a more general framework (full spillover) whereby we allow for lagged dependence across all variances and covariances. The forecasting analysis shows that considering only sector- and currency-risk spillovers, rather than full spillovers, improves performance, both in economic and statistical terms.

Authors Bonato, Matteo; Caporin, Massimiliano & Ranaldo, Angelo
Journal or Publication Title Journal of Empirical Finance
Language English
Keywords Risk spillover; portfolio risk; currency risk; variance forecasting; international portfolio; Wishart distribution.
Subjects business studies
HSG Classification contribution to scientific community
Refereed Yes
Date December 2013
Publisher Elsevier Science
Place of Publication Amsterdam
Volume 2013
Number 24
Page Range 121-137
Number of Pages 17
ISSN 0927-5398
ISSN-Digital 1879-1727
Publisher DOI 10.1016/j.jempfin.2013.09.005
Depositing User Prof. Dr. Angelo Ranaldo
Date Deposited 04 Dec 2012 09:03
Last Modified 23 Aug 2016 11:15
URI: https://www.alexandria.unisg.ch/publications/218466

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Citation

Bonato, Matteo; Caporin, Massimiliano & Ranaldo, Angelo (2013) Risk spillovers in international equity portfolios. Journal of Empirical Finance, 2013 (24). 121-137. ISSN 0927-5398

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https://www.alexandria.unisg.ch/id/eprint/218466
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