Journal of Risk
ISSN:
1465-1211 (print)
1755-2842 (online)
Editor-in-chief: Farid AitSahlia
Scaling portfolio volatility and calculating risk contributions in the presence of serial cross-correlations
Nikolaus Rab and Richard Warnung
Abstract
ABSTRACT
In practice, the daily volatility of portfolio returns is transformed to longer holding periods by multiplying by the square root of time, which assumes that returns are not serially correlated. Under this assumption, this scaling procedure can also be applied to contributions to the volatility of the assets in the portfolio. Close prices are often used to calculate the profit and loss of a portfolio. rading at exchanges located in distant time zones, this can lead to significant serial cross-correlations of the closing-time returns of the assets in the portfolio. These serial correlations cause the square-root-of-time rule to fail. Moreover, volatility contributions in this setting turn out to be misleading due to nonsynchronous correlations. We address this issue and provide alternative procedures for scaling volatility and calculating risk contributions for arbitrary holding periods.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net