An Evaluation Framework for Alternative VAR Models
25 Pages Posted: 21 Jan 2002
There are 3 versions of this paper
An Evaluation Framework for Alternative VAR Models
An Evaluation Framework for Alternative VAR Models
An Evaluation Framework for Alternative VAR Models
Abstract
In this paper we investigate the ability of different models to produce useful VaR-estimates for exchange rate positions. We make a distinction between models that include sophisticated tail properties and models that do not. The former type of models often leads to too extreme VaR-estimates, whereas the latter type underestimates the risk in case of extreme events. Our analysis shows that it is important to take into account parameter uncertainty, since this leads to uncertainty in the reported VaR. We make this uncertainty in the VaR explicit by means of simulation. Our empirical results suggest that more sophisticated tail-modeling approaches come at the cost of more uncertainty about the VaR estimate itself. In the case of the GARCH(1,1) - Student model the average VaR may be adjusted for parameter uncertainty to arrive at levels which are adequate according to out-of-sample tests.
Keywords: Value-at-Risk, Financial Time Series, Exchange Rate Positions, GARCH, Estimation Risk, Fat Tail Distributions
JEL Classification: C22, C52, G10
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
An Evaluation Framework for Alternative VAR Models
By Dennis Bams, Thorsten Lehnert, ...
-
An Evaluation Framework for Alternative VAR Models
By Christian C. P. Wolff, Dennis Bams, ...
-
A Cumulative Prospect Theory Approach to Option Pricing
By Cokki Versluis, Thorsten Lehnert, ...
-
Loss Functions in Option Valuation: A Framework for Model Selection
By Dennis Bams, Thorsten Lehnert, ...
-
Loss Functions in Option Valuation: A Framework for Model Selection
By Dennis Bams, Thorsten Lehnert, ...
-
On the Role of Behavioral Finance in the Pricing of Financial Derivatives: The Case of the S&P 500
By Giovanna Zanotti, Alonso Pena, ...
-
On the Role of Behavioral Finance in the Pricing of Financial Derivatives: The Case of the S&P 500
By Alonso Pena, Barbara Alemanni, ...
-
The Impact of Stress Scenarios on VaR and Expected Shortfall
By Sanjay Basu
-
Model-Based Stress Tests: Linking Stress Tests to VaR for Market Risk