FARVaR: Functional Autoregressive Value-at-Risk
Journal of Financial Econometrics, forthcoming
81 Pages Posted: 23 Mar 2014 Last revised: 5 Mar 2019
Date Written: November 15, 2018
Motivated by the stylized fact that intraday returns can provide additional information on the tail behaviour of daily returns, we propose a functional autoregressive value-at-risk approach which can directly incorporate such informational advantage into the daily value-at-risk forecast. Our approach leads to greater flexibility in modelling the dynamic evolution of the density function of intraday returns and the ability to capture substantial swings in the tails following major events. We comprehensively evaluate our proposed model using intraday transaction data and demonstrate that it can improve coverage ability, reduce economic cost and enhance statistical reliability in market risk management.
Keywords: density forecasts; financial risk management; functional autoregressive model
JEL Classification: G17, C53
Suggested Citation: Suggested Citation