BFS 2002

Poster Presentation

Although the multivariate normality of stock returns is a crucial assumption in many asset pricing models, the modern econometric literature abounds with evidence against this hypothesis. Instead, we model the multivariate process of returns using a two-step decomposition approach: First, we estimate a non-stationary covariance structure and second, we model the relatively stable, quasi-stationary, but heavy-tailed and asymmetric residuals. Numerical experiments indicate that the dynamics of multivariate returns for a variety of financial instruments can be adequately explained using our approach.