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http://ssrn.com/abstract=2194917
 
 

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Displaced Historical Simulation Improves Modeling of Possibly 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

December 14, 2013


Abstract:     
In this paper we introduce the displaced relative change (DRC) model and the displaced filtered historical simulation (DFHS) model. These models make possible historical simulations based on potentially negative risk factors, 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 government bond yields. Our empirical results show that compared to other models in the literature, models with our proposed displacement feature handle situations of close-to-zero or negative interest rates particularly well.

Number of Pages in PDF File: 27

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: December 15, 2013

Suggested Citation

Fries, Christian P. and Nigbur, Tobias and Seeger, Norman, Displaced Historical Simulation Improves Modeling of Possibly Negative-Valued Financial Risk Values: Application to VaR in Times of Negative Government Bond Yields (December 14, 2013). 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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