Risk-Managing the Uncertainty in VAR Parameters

In 'THE VAR IMPLEMENTATION HANDBOOK', Chapter 18, pp. 385-400, G. Gregoriou, ed., McGraw-Hill, 2009

Posted: 26 Mar 2010 Last revised: 28 Dec 2016

See all articles by Jason C. Hsu

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Vitali Kalesnik

Research Affiliates LLC

Date Written: November 2, 2010

Abstract

Managing risk successfully requires a detailed understanding of the distributions from which random shocks to asset prices are drawn. However, there is uncertainty in both the actual distribution of returns and the parameters characterizing the distribution. In this chapter, we focus on the uncertainty in estimating the distributional parameters, and how this uncertainty impacts value at risk calculations. We illustrate some traditional (but naïve) methods for handling parameter uncertainty and show that these methods could often lead to poor risk management results. We then provide techniques for quantifying risk more accurately when distribution parameters are estimated with low precision or when there are disagreements over the parameter estimates.

Keywords: Value at Risk, Parameter Uncertainty

JEL Classification: G10

Suggested Citation

Hsu, Jason C. and Kalesnik, Vitali, Risk-Managing the Uncertainty in VAR Parameters (November 2, 2010). In 'THE VAR IMPLEMENTATION HANDBOOK', Chapter 18, pp. 385-400, G. Gregoriou, ed., McGraw-Hill, 2009. Available at SSRN: https://ssrn.com/abstract=1574948

Jason C. Hsu (Contact Author)

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Vitali Kalesnik

Research Affiliates LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8717 (Phone)
949-325-8917 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

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