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Next: Treatment of pathological VaR Up: Problems of pathological VaR Previous: Bias due to portfolio

Negative variance

We have already mentioned in section [*] the possibility for $\Sigma_t$ having negative eigen-values and hence admitting the existence of portfolios for which the forecast variance of assets is negative. This is clearly a pathological situation that requires to be addressed. Below we present a preliminary framework for addressing all of the above problems which also serves to partially address the problem of negative variance.