Learning by Failing: A Simple VAR Buffer

15 Pages Posted: 20 Apr 2013

See all articles by Christophe Boucher

Christophe Boucher

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES)

Bertrand B. Maillet

EMLyon Business School (Paris Campus)

Date Written: May 2013

Abstract

We study in this article the problem of model risk in VaR computations and document a procedure for correcting the bias due to specification and estimation errors. This practical method consists of “learning from model mistakes”, since it dynamically relies on an adjustment of the VaR estimates – based on a back‐testing framework – such as the frequency of past VaR exceptions always matches the expected probability. We finally show that integrating the model risk into the VaR computations implies a substantial minimum correction to the order of 10–40% of VaR levels.

JEL Classification: C14, C50, G11, G32

Suggested Citation

Boucher, Christophe and Maillet, Bertrand B., Learning by Failing: A Simple VAR Buffer (May 2013). Financial Markets, Institutions & Instruments, Vol. 22, Issue 2, pp. 113-127, 2013. Available at SSRN: https://ssrn.com/abstract=2254174 or http://dx.doi.org/10.1111/fmii.12006

Christophe Boucher

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES) ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
France

HOME PAGE: http://ces.univ-paris1.fr/membre/boucher/christophe.html

Bertrand B. Maillet

EMLyon Business School (Paris Campus) ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

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