Dynamic Factor Value-at-Risk for Large Heteroskedastic Portfolios

35 Pages Posted: 20 May 2011 Last revised: 18 Nov 2012

See all articles by Sirio Aramonte

Sirio Aramonte

Bank for International Settlements (BIS)

Marius Rodriguez

Board of Governors of the Federal Reserve System

Jason Wu

Hong Kong Monetary Authority

Date Written: September 18, 2012

Abstract

We propose a methodology that can efficiently measure the Value-at-Risk (VaR) of large portfolios with time-varying volatilities and correlations by bringing together the established historical simulation framework and recent contributions to the Dynamic Factor Models literature. We find that the proposed methodology compares well with widely used VaR models, and is a significant improvement from a computational point of view.

Keywords: Risk Management, Value-at-Risk, Dynamic Factor Models

JEL Classification: C1, C22

Suggested Citation

Aramonte, Sirio and Rodriguez, Marius and Wu, Jason, Dynamic Factor Value-at-Risk for Large Heteroskedastic Portfolios (September 18, 2012). FEDS Working Paper No. 2011-19. Available at SSRN: https://ssrn.com/abstract=1845846 or http://dx.doi.org/10.2139/ssrn.1845846

Sirio Aramonte

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Marius Rodriguez

Board of Governors of the Federal Reserve System ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Jason Wu (Contact Author)

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

HOME PAGE: http://https://sites.google.com/site/jasonwuresearch/

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