Time varying correlation estimation using probabilistic fuzzy systems

N. Baştürk, R.J. Almeida

Research output: Chapter in Book/Report/Conference proceedingConference contributionAcademicpeer-review

2 Citations (Scopus)
5 Downloads (Pure)

Abstract

Accurate financial risk analysis has drawn considerable attention after the recent financial crisis. Several regulatory agencies recently documented the need for proper assessment and reporting of financial risk for banks and other financial institutions. It is stressed that risk analysis should take into account changing risk properties over time. For a set of financial assets, risk analysis relies on the correlation and covariance structure among these returns from these assets. Therefore analyzing changes in the correlations and covariances of assets is essential to document changing risk properties. In this paper we show that a PFS can be used to model unobserved time-varying correlation between financial returns. The method is applied to simulated data and real data of daily NASDAQ and HSI stock returns. We show that the PFS application improves over the conventional moving window approximation of time-varying correlation by decreasing the sensitivity of the results to the selection of the window length.

Original languageEnglish
Title of host publicationIPMU 2016: Information Processing and Management of Uncertainty in Knowledge-Based Systems
EditorsJ.P. Carvalho, M.J. Lesot, U. Kaymak, S. Vieira, B. BouchonMeunier, R.R. Yager
Place of PublicationCham
PublisherSpringer
Pages752-763
Number of pages12
ISBN (Print)9783319405803
DOIs
Publication statusPublished - 2016
Event16th International Conference on Information Processing and Management of Uncertainty in Knowledge-Based Systems (IPMU 2016) - Eindhoven University of Technology , Eindhoven, Netherlands
Duration: 20 Jun 201624 Jun 2016
Conference number: 16
http://is.ieis.tue.nl/ipmu/

Publication series

NameCommunications in Computer and Information Science
Volume611
ISSN (Print)18650929

Conference

Conference16th International Conference on Information Processing and Management of Uncertainty in Knowledge-Based Systems (IPMU 2016)
Abbreviated titleIPMU 2016
Country/TerritoryNetherlands
CityEindhoven
Period20/06/1624/06/16
Internet address

Keywords

  • Probabilistic fuzzy systems
  • Risk analysis
  • Time-varying correlations

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