A multivariate FGD technique to improve VaR computation in equity markets

It is difficult to compute Value-at-Risk (VaR) using multivariate models able to take into account the dependence structure between large numbers of assets and being still computationally feasible. A possible procedure is based on functional gradient descent (FGD) estimation for the volatility matrix in connection with asset historical simulation. Backtest analysis on simulated and real data provides strong empirical evidence of the better predictive ability of the proposed procedure over classical filtered historical simulation, with a resulting significant improvement in the measurement of risk.Francesco Audrino and Giovanni Barone-Adesi: The authors would like to thank Peter Bühlmann and two anonymous referees for some helpful comments. Financial support by the National Centre of Competence in Research Financial Valuation and Risk Management (NCCR FINRISK) is gratefully acknowledged.