Evaluating covariance matrix forecasts in a value-at-risk framework

Covariance matrix forecasts of financial asset returns are an important component of current practice in financial risk management. A wide variety of models, ranging from matrices of simple summary measures to covariance matrices implied from option prices, are available for generating such forecasts. In this paper, we evaluate the relative accuracy of different covariance matrix forecasts using standard statistical loss functions and a value-at-risk (VaR) framework. This framework consists of hypothesis tests examining various properties of VaR models based on these forecasts as well as an evaluation using a regulatory loss function. ; Using a foreign exchange portfolio, we find that implied covariance matrix forecasts appear to perform best under standard statistical loss functions. However, within the economic context of a VaR framework, the performance of VaR models depends more on their distributional assumptions than on their covariance matrix specification. Of the forecasts examined, simple specifications, such as exponentially-weighted moving averages of past observations perform best with regard to the magnitude of VaR exceptions and regulatory capital requirements. These results provide empirical support for the commonly-used VaR models based on simple covariance matrix forecasts and distributional assumptions.Financial markets ; Risk ; Econometric models ; Forecasting

Is implied correlation worth calculating? Evidence from foreign exchange options and historical data

Implied volatilities, as derived from option prices, have been shown to be useful in forecasting the subsequently observed volatility of the underlying financial variables. In this paper, we address the question of whether implied correlations, derived from options on the exchange rates in a currency trio, are useful in forecasting the observed correlations. We compare the forecast performance of the implied correlations from two currency trios with markedly different characteristics against correlation forecasts based on historical, time-series data. For the correlations in the USD/DEM/JPY currency trio, we find that implied correlations are useful in forecasting observed correlations, but they do not fully incorporate all the information in the historical data. For the correlations in the USD/DEM/CHF currency trio, implied correlations are much less useful. In general, since the performance of implied correlations varies across currency trios, implied correlations may not be worth calculating in all instances.Options (Finance) ; Foreign exchange

Modeling J /Psi production and absorption in a microscopic nonequilibrium approach

Charmonium production and absorption in heavy ion collisions is studied with the Ultrarelativisitic Quantum Molecular Dynamics model. We compare the scenario of universal and time independent color-octet dissociation cross sections with one of distinct color-singlet J/psi, psi 2 and CHIc states, evolving from small, color transparent configurations to their asymptotic sizes. The measured J/psi production cross sections in pA and AB collisions at SPS energies are consistent with both purely hadronic scenarios. The predicted rapidity dependence of J/psi suppression can be used to discriminate between the two experimentally. The importance of interactions with secondary hadrons and the applicability of thermal reaction kinetics to J/psi absorption are in- vestigated. We discuss the e ect of nuclear stopping and the role of leading hadrons. The dependence of the 2/J/psi ratio on the model assumptions and the possible influence of refeeding processes is also studied

Direct photons in Pb+Pb at CERN-SPS from microscopic transport theory

Direct photon production in central Pb+Pb collisions at CERN-SPS energy is calculated within the relativistic microscopic transport model UrQMD, and within distinctly di erent versions of relativistic hydrodynamics. We find that in UrQMD the local momentum distributions of the secondaries are strongly elongated along the beam axis initially. Therefore, the preequilibrium contribution dominates the photon spectrum at transverse momenta above H 1.5 GeV. The hydrodynamics prediction of a strong correlation between the temperature and radial expansion velocities on the one hand and the slope of the transverse momentum distribution of direct photons on the other hand thus is not recovered in UrQMD. The rapidity distribution of direct photons in UrQMD reveals that the initial conditions for the longitudinal expansion of the photon source (the meson fluid ) resemble rather boostinvariance than Landau-like flow

Dissociation rates of J / psi's with comoving mesons : thermal versus nonequilibrium scenario.

We study J/psi dissociation processes in hadronic environments. The validity of a thermal meson gas ansatz is tested by confronting it with an alternative, nonequilibrium scenario. Heavy ion collisions are simulated in the frame- work of the microscopic transport model UrQMD, taking into account the production of charmonium states through hard parton-parton interactions and subsequent rescattering with hadrons. The thermal gas and microscopic transport scenarios are shown to be very dissimilar. Estimates of J/psi survival probabilities based on thermal models of comover interactions in heavy ion collisions are therefore not reliable

Coupling of finite-volume-method and incompressible smoothed particle hydrodynamics method for multiphase flow

It is an intuitive way to use the advantages of two different simulation methods, such as the Finite-Volume (FV) and Smoothed Particle Hydrodynamics (SPH), to reduce the computational effort. Finite-Volume, like other grid-based methods, is advan- tageous for huge systems without fluid-fluid interfaces, whereas SPH is advantageous in the vicinity of fluid interfaces. We will present our first results for a combined simula- tion, including a moving SPH domain, in a simple Poiseuille flow and a more complex multiphase capillary rise scenario

The origin of transverse flow at the SPS

We study the transverse expansion in central Pb+Pb collisions at the CERN SPS. Strong collective motion of hadrons can be created. This flow is mainly due to meson baryon rescattering. It allows to study the angular distribution of intermediate mass meson baryon interactions

Excitation function of energy density and partonic degrees of freedom in relativistic heavy ion collisions

We estimate the energy density epsilon pile-up at mid-rapidity in central Pb+Pb collisions from 2 200 GeV/nucleon. epsilon is decomposed into hadronic and partonic contributions. A detailed analysis of the collision dynamics in the framework of a microscopic transport model shows the importance of partonic degrees of freedom and rescattering of leading (di)quarks in the early phase of the reaction for Elab 30 GeV/nucleon. In Pb+Pb collisions at 160 GeV/nucleon the energy density reaches up to 4 GeV/fm3, 95% of which are contained in partonic degrees of freedom

J/psi suppression in heavy ion collisions - interplay of hard and soft QCD processes

We study J/psi suppression in AB collisions assuming that the charmonium states evolve from small, color transparent configurations. Their interaction with nucleons and nonequilibrated, secondary hadrons is simulated us- ing the microscopic model UrQMD. The Drell-Yan lepton pair yield and the J/psi /Drell-Yan ratio are calculated as a function of the neutral transverse en- ergy in Pb+Pb collisions at 160 GeV and found to be in reasonable agreement with existing data

A microscopic calculation of secondary Drell-Yan production in heavy ion collisions

A study of secondary Drell-Yan production in nuclear collisions is presented for SPS energies. In addition to the lepton pairs produced in the initial collisions of the projectile and target nucleons, we consider the potentially high dilepton yield from hard valence antiquarks in produced mesons and antibaryons. We calculate the secondary Drell-Yan contributions taking the collision spectrum of hadrons from the microscopic model URQMD. The con- tributions from meson-baryon interactions, small in hadron-nucleus interac- tions, are found to be substantial in nucleus-nucleus collisions at low dilepton masses. Preresonance collisions of partons may further increase the yields