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On the Time Scaling of Value-at-Risk with Trading
Company: Journal of Risk Model Validation
Company Url: Click here to open
Year Of Publication: 2012
Month Of Publication: January
Resource Link: Click here to open
Download Count: 0
View Count: 1735
Comment Num: 0
Language: English
Source: article
Who Can Read: Free
Date: 8-17-2014
Publisher: Administrator
Summary
Using stock data that covers the period from April 6, 2001 to June 17, 2009, including data from the recent financial crisis period, we compare theVaR profiles of four different stylized daily trading methods for estimating ten-day VaR. The trading methods are the convex, concave and volatility-based trading methods. In our analysis we find that the trading strategy may have a substantial impact on the accuracy of the square-root-of-time rule in scaling VaR. This effect is especially pronounced in the case of buy-volatility trading strategies, where risk is amplified by trading into volatile instruments, yielding significantly higher risk than would be the case under a buy-and-hold assumption or a square-root-of-time rule. On the other hand, risk reduction versus buy-and-hold for strategies that trade into low-volatility instruments may be small. Our findings strongly support the argument that measures of risk should take traders' styles and portfolio-level trading strategies into account.
Author(s)
Skoglund, Jimmy Sign in to follow this author
Erdman, Donald Sign in to follow this author
Chen, Wei Sign in to follow this author
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