CEBA talks 2020-2022
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Penalized CAW, Forecast Error Variance Decompositions and Systemic Risk Measurement

Authors: M. Caporin and G. Storti

Abstract: We discuss parameter estimation of the Conditional Autoregressive Wishart model under penalization. We introduce two novel Forecast Error Variance Decompositions where returns shocks impact on the entire set of realized variances and covariances, the first following a more traditional approach and the second based on simulations. From both decompositions we derive a spillover index to monitor the systemic risk. An empirical analysis on US large cap equities exemplifies our proposals.
Keywords: FEVD, DY index, RCOV, CAW model
JEL: C10, C13, C32, C33, C55, C58

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