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Value-at-Risk for Long and Short Positions: A Comparison of Regime-Switching GARCH and ARCH Family Models
Company: University of Essex
Year Of Publication: 2006
Month Of Publication: October
Pages: 61
Download Count: 15
View Count: 1418
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 8-3-2010
Publisher: Administrator
Summary
This paper compares a collection of ARCH family models in terms of their ability to model Value-at-Risk (VaR) for both long and short positions. To take into account the leverage effect, usually found in financial returns data, we allow for both asymmetry in the conditional variance equation and skewness in the error terms. The models are extended to a Markov Regime-Switching (MS) framework to take account the excessive persistence usually found in GARCH models. Their performance is assessed by means of an out-of-sample testing procedure on daily data for UK and US market stock indices. We show that aallowing for skewness and MS effects are crucial for obtaining accurate VaR forecasts for traders with both long and short positions. Hansen’s SPA test also shows that ignoring such effects imposes considerably larger capital requirements
Author(s)
Nankervis, John Sign in to follow this author
Sajjad, Rasoul Sign in to follow this author
Coakley, Jerry Sign in to follow this author
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