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A Coupling of Extreme Value Theory and Volatility Updating with Value-at-Risk Estimation
Company: Multinational Finance Journal
Year Of Publication: 2003
Month Of Publication: June
Pages: 3-23
Download Count: 1103
View Count: 11193
Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 5-12-2004
Publisher: Administrator
Summary
This research is aimed at a formal appraisal of recent advancements instochastic volatility modeling and extreme-value theory to application of valueat-risk computation in particularly volatile markets. Established methods suchas historical simulation are prone to underestimating value-at-risk in suchdeveloping markets. Two contemporary methods of value-at-risk calculationare tested on a representative portfolio of South African stocks. The firstmethod incorporates extreme value theory. The second model includes bothextreme value theory and volatility updating (via GARCH-type modeling). Thecombined GARCH-type time-series approach and extreme value theory modelis found to provide significantly better results than both straightforwardhistorical simulation as well as the extreme value model. In no instance,however, were results on these VaR methods as good as those obtained whenthe same methods were tested in developed markets. This research highlightsnoteworthy improvements to value-at-risk estimation efficacy in volatileemerging markets, and also stresses the need for further work into the estimationof value-at-risk in this context,
Author(s)
Seymour, Anthony J. Sign in to follow this author
Polakow, Daniel A. Sign in to follow this author
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