Download This PaperStress Testing for Market Risk: A Comparison of VAR Methods
24 Pages Posted: 1 Apr 2009
Date Written: March 31, 2009
Abstract
The subprime crisis has shown us again that actual shocks in stressed markets are much more severe than historical scenarios. In this paper, we compare stress tests for foreign exchange positions, based on hypothetical scenarios, across a number of VaR methods. We conclude that volatility weighted historical simulation is the best one, because risk estimates change smoothly with the size of shocks and the impact of stress is also felt on short positions. It captures volatility clustering and fat tails in a simple framework.
Keywords: Volatility updation, Age-weighted simulation, diversification, Fat tails, nonparametric methods
JEL Classification: G21, G32
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
An Evaluation Framework for Alternative VAR Models
By Dennis Bams, Thorsten Lehnert, ...
-
An Evaluation Framework for Alternative VAR Models
By Dennis Bams, Thorsten Lehnert, ...
-
An Evaluation Framework for Alternative VAR Models
By Christian C. P. Wolff, Dennis Bams, ...
-
A Cumulative Prospect Theory Approach to Option Pricing
By Cokki Versluis, Thorsten Lehnert, ...
-
Loss Functions in Option Valuation: A Framework for Model Selection
By Dennis Bams, Thorsten Lehnert, ...
-
Loss Functions in Option Valuation: A Framework for Model Selection
By Dennis Bams, Thorsten Lehnert, ...
-
On the Role of Behavioral Finance in the Pricing of Financial Derivatives: The Case of the S&P 500
By Giovanna Zanotti, Alonso Pena, ...
-
On the Role of Behavioral Finance in the Pricing of Financial Derivatives: The Case of the S&P 500
By Alonso Pena, Barbara Alemanni, ...
-
The Impact of Stress Scenarios on VaR and Expected Shortfall
By Sanjay Basu