Fat Tail distribution

[Sidharth]

Saunders chapter 2 :

Q1) What is conditional and unconditional volatility distribution ?? can you gimme example...
Q2) what way the portfolio returns are aggregated ??

Thanks in advance
sidharth

 

[David Harper CFA FRM]

sidharth,

don't know how/why Saunders Ch 2, but

1. GARCH(1,1) has returns that are conditionally normal and unconditionally non-normal (heavy tailed)
2. Various answers, need more info. Might refer to: we can use log returns to aggregate over time ("time additive); i.e., daily to 10-day log returns are additive. But, to add component/position returns "cross sectionally" can't use log return must use simple

David

 

[Sidharth]

Sauder how/why..

these are doubtw which came to me .while studying this chapter.....so i thought it might help to clarify question..

regarding aggregating returns....can u explain on historical simulation approach ??