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The Two-Parameter Long-Horizon Value-at-Risk
Year Of Publication: 2010
Month Of Publication: April
Pages: 20
Download Count: 8
View Count: 1857
Comment Num: 0
Language: English
Who Can Read: Free
Date: 5-1-2010
Publisher: Administrator
Summary
Value-at-Risk (VaR) has become a standard measure for risk management and
regulation. In the case of a two-parameter distribution, a common method
among practitioners is first to calculate the daily VaR and then to apply it to a
longer investment horizon by using the Square Root Rule (SRR). We show
that the SRR is theoretically incorrect and propose a correct measure. The
error from employing the SRR is positive for short horizons, inducing an
overestimation of the true VaR, and negative for longer horizons, inducing
underestimation of the true VaR. This error is relatively small for conservative
portfolios and for short horizons. However, for risky portfolios and for long
horizons – where accurate VaR is most important – the underestimation error
is both substantial and systemati
Author(s)
Kaplanski, Guy Sign in to follow this author
Levy, Haim Sign in to follow this author
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