Abstract

http://ssrn.com/abstract=2194917
 
 

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Displaced Historical Simulation is a Solution for Negative-Valued Financial Risk Values: Application to VaR in Times of Negative Government Bond Yields


Christian P. Fries


LMU Munich, Department of Mathematics; DZ Bank AG

Tobias Nigbur


University of St. Gallen

Norman Seeger


VU University Amsterdam

March 11, 2016


Abstract:     
In this paper we introduce the displaced historical simulation model. The model makes possible historical simulations based on potentially negative risk variable, such as interest rates or spreads. This is an issue of recent and major interest to the financial sector, both from a regulatory and financial institutions perspective, especially in light of observed negative values for major bond yield and interest rate spread time series . Using historical simulation, the most widely used way of producing a distribution of possible future values of a risk variable is build around the concept of relative shifts (e.g. log-returns) applied to historical data. The relative shifts are "displaced" in an elegant way such that negative values can be handled. Our empirical results show that compared to other models in the literature, models equipped with our proposed displacement feature handle situations of close-to-zero or negative risk variables particularly well.

Number of Pages in PDF File: 40

Keywords: Historical simulation, generalizations, negative risk factors, Value at Risk

JEL Classification: C43, G17, G20, G30


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Date posted: January 1, 2013 ; Last revised: March 12, 2016

Suggested Citation

Fries, Christian P. and Nigbur, Tobias and Seeger, Norman, Displaced Historical Simulation is a Solution for Negative-Valued Financial Risk Values: Application to VaR in Times of Negative Government Bond Yields (March 11, 2016). Available at SSRN: http://ssrn.com/abstract=2194917 or http://dx.doi.org/10.2139/ssrn.2194917

Contact Information

Christian P. Fries (Contact Author)
LMU Munich, Department of Mathematics ( email )
Theresienstrasse 39
Munich
Germany
DZ Bank AG ( email )
60265 Frankfurt am Main
Germany
Tobias Nigbur
University of St. Gallen ( email )
Norman Seeger
VU University Amsterdam ( email )
De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 1512 (Phone)
HOME PAGE: http://www.norman-seeger.com
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