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Value-at-Risk: A Multivariate Switching Regime Approach
Company: Journal of Empirical Finance
Company Url: Click here to open
Year Of Publication: 2000
Month Of Publication: December
Pages: 531-554
Download Count: 1442
View Count: 8881
Comment Num: 0
Language: EN
Source: article
Who Can Read: Free
Date: 9-2-2002
Publisher: Administrator
Summary
This paper analyses the application of a switching volatility model to forecast return distribution and then to estimate the asset VaR value that accounts for non normal return distribution. In order to present our approach we calculated the VaR value for the FTSE100 index. We used the forecasted districution of our models and the normal distribution derived from the EWMA approach (the approach used by JP Morgan in RiskMetrics?). The VaR values calculated by our approach are larger than when determined using the EWMA. The difference grows as the percentile is increased form 95% to 99.5%. Moreover, we show how this approach captures the skewness that characterises the FTSE100 index returns. Furthermore, our approach captures properly the cluster effect (high volatility is usually followed by high volatility) characterising the return time series. We show how the sue of switching volatility allows to improve the risk management systems and capital requirement definition. In particular, we give some hints on how to perform stress testing and to define exposure limits taking into account stochastic volatility risk and correlation between volatility and returns.
(volume 7, number 5)
Author(s)
Billio, Monica Sign in to follow this author
Pelizzon, Loriana Sign in to follow this author
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