Forecasting Value-at-Risk Under Temporal and Portfolio Aggregation

Tinbergen Institute Discussion Paper 15-140/III

91 Pages Posted: 6 Jan 2016 Last revised: 25 Apr 2017

See all articles by Erik Kole

Erik Kole

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM; Tinbergen Institute

Thijs D. Markwat

Robeco Asset Management

Anne Opschoor

Vrije Universiteit Amsterdam

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Date Written: December 31, 2015

Abstract

We examine the impact of temporal and portfolio aggregation on the quality of Value-at-Risk (VaR) forecasts over a horizon of ten trading days for a well-diversified portfolio of stocks, bonds and alternative investments. The VaR forecasts are constructed based on daily, weekly or biweekly returns of all constituent assets separately, gathered into portfolios based on asset class, or into a single portfolio. We compare the impact of aggregation to that of choosing a model for the conditional volatilities and correlations, the distribution for the innovations and the method of forecast construction. We find that the degree of temporal aggregation is most important. Daily returns form the best basis for VaR forecasts. Modelling the portfolio at the asset or asset class level works better than complete portfolio aggregation, but differences are smaller. The differences from the model, distribution and forecast choices are also smaller compared to temporal aggregation.

Keywords: forecast evaluation, aggregation, Value-at-Risk, model comparison

JEL Classification: C22, C32, C52, C53, G17

Suggested Citation

Kole, Erik and Markwat, Thijs Dingeman and Opschoor, Anne and van Dijk, Dick J.C., Forecasting Value-at-Risk Under Temporal and Portfolio Aggregation (December 31, 2015). Tinbergen Institute Discussion Paper 15-140/III, Available at SSRN: https://ssrn.com/abstract=2711203 or http://dx.doi.org/10.2139/ssrn.2711203

Erik Kole (Contact Author)

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 12 58 (Phone)

HOME PAGE: http://people.few.eur.nl/kole

ERIM

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

HOME PAGE: http://people.few.eur.nl/kole

Thijs Dingeman Markwat

Robeco Asset Management ( email )

Weena 850
3014 DA
Rotterdam
Netherlands

Anne Opschoor

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL 1081 HV
Netherlands

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

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