Forecasting VAR and Expected Shortfall Using Dynamical Systems: A Risk Management Strategy

IDHE-MORA Note of Research No. 07-2004

28 Pages Posted: 28 Apr 2006

See all articles by Dominique Guegan

Dominique Guegan

Ecole Normale Superieure de Cachan

Caillault Cyril

affiliation not provided to SSRN

Date Written: June 27, 2004

Abstract

Using copulas' approach and parametric models, we show that the bivariate distribution of an Asian portfolio is not stable all along the period under study. Thus, we develop several dynamical models to compute two market risk's measures: the Value at Risk and the Expected Shortfall. The methods considered are the RiskMetric methodology, the Multivariate GARCH models, the Multivariate Markov-Switching models, the empirical histogram and the dynamical copulas. We discuss the choice of the best method with respect to the policy management of banks supervisors. The copula approach seems to be a good compromise between all these models. It permits to take into account financial crises and to obtain a low capital requirement during the most important crises.

Keywords: Value at Risk, Expected Shortfall, Copula, RiskMetrics, Risk management

JEL Classification: C15, C32, C52, G28

Suggested Citation

Guegan, Dominique and Cyril, Caillault, Forecasting VAR and Expected Shortfall Using Dynamical Systems: A Risk Management Strategy (June 27, 2004). IDHE-MORA Note of Research No. 07-2004, Available at SSRN: https://ssrn.com/abstract=898828 or http://dx.doi.org/10.2139/ssrn.898828

Dominique Guegan (Contact Author)

Ecole Normale Superieure de Cachan ( email )

61 avenue du President Wilson
Cachan
France

Caillault Cyril

affiliation not provided to SSRN

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