Comparing Different Methods of Calculating Value at Risk

Abstract

We compare the performance of three different methods of calculating VaR in the context of volatile markets. Some of these methods are routinely used for banks, pension funds and mutual funds without critical valuation of their efficiency. We examine weaknesses of these methods by using five different tests. They are (1) test based on the time until first failure, (2) test based on failure rate, (3) test based on expected value, (4) test based on autocorrelation, and (5) test based on (rolling) mean absolute percentage error.

Keywords: Value at risk, first failure, failure rate, expected value, autocorrelation, mean absolute percentage error

JEL Classification: G1, G11, G18