Ayush Jha, Abootaleb Shirvani, Ali Jaffri, Svetlozar T. Rachev, Frank J. Fabozzi
arXiv 18 May 2025 · Econometrics
arXiv:2505.12198 · PDF · DOI · OpenAlex · Extracted main text
This paper develops and estimates a multivariate affine GARCH(1,1) model with Normal Inverse Gaussian innovations that captures time-varying volatility, heavy tails, and dynamic correlation across asset returns. We generalize the Heston-Nandi framework to a multivariate setting and apply it to 30 Dow Jones Industrial Average stocks. The model jointly supports three core financial applications: dynamic portfolio optimization, wealth path simulation, and option pricing. Closed-form solutions are derived for a Constant Relative Risk Aversion (CRRA) investor's intertemporal asset allocation, and we implement a forward-looking risk-adjusted performance comparison against Merton-style constant strategies. Using the model's conditional volatilities, we also construct implied volatility surfaces for European options, capturing skew and smile features. Empirically, we document substantial wealth-equivalent utility losses from ignoring time-varying correlation and tail risk. These findings underscore the value of a unified econometric framework for analyzing joint asset dynamics and for managing portfolio and derivative exposures under non-Gaussian risks.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Heston, S. L., & Nandi, S (2000) A closed-form GARCH option valuation model | 0.956 | 8 | 4 | 88% |
| 2 | Escobar-Anel, M., Yang, Y.-J., & Zagst, R (2025) Multivariate affine GARCH in portfolio optimization: Analytical solutions and applications | 0.737 | 3 | 3 | 67% |
| 3 | Andersen, T. G., Bollerslev, T., Diebold, F. X., & Vega, C (2007) Real-time price discovery in global stock, bond and foreign exchange markets | 0.511 | 2 | 1 | 100% |
| 4 | Christoffersen, P., Heston, S. L., & Jacobs, K (2013) Capturing option anomalies with a variance-dependent pricing kernel | 0.511 | 2 | 1 | 100% |
| 5 | Barone-Adesi, G., Engle, R. F., & Mancini, L (2008) A GARCH option pricing model with filtered historical simulation | 0.405 | 1 | 1 | 100% |
| 6 | Ang, A., & Bekaert, G.\ (2002) International asset allocation with regime shifts | 0.405 | 1 | 1 | 100% |
| 7 | Barberis, N.\ (2000) Investing for the long run when returns are predictable | 0.405 | 1 | 1 | 100% |
| 8 | Bergen, V., Escobar-Anel, M., Rubtsov, A., & Zagst, R (2018) Robust multivariate portfolio choice with stochastic covariance in the presence of ambiguity | 0.405 | 1 | 1 | 100% |
| 9 | Brennan, M.\ J., Schwartz, E.\ S., & Lagnado, R.\ (1997) Strategic asset allocation | 0.405 | 1 | 1 | 100% |
| 10 | Brennan, M.\ J., & Xia, Y.\ (2002) Dynamic asset allocation under inflation | 0.405 | 1 | 1 | 100% |
Showing the top 10 of 27 scored citations.