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square root of time sign in to follow this
multi-day horizion sign in to follow this
time scaling sign in to follow this
serial dependence sign in to follow this
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How Accurate is the Square-root-of-time Rule in Scaling Tail Risk? A Global Study
Year Of Publication: 2010
Month Of Publication: August
Pages: 29
Download Count: 10
View Count: 1321
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 8-12-2010
Publisher: Administrator
Summary
The square-root-of-time rule (SRTR) is popular in assessing multi-period VaR; however, it make several unrealistic assumptions. We examine and reconcile different stylized factors in returns that contribute to the SRTR scaling distortions. In complementing the use of the variance ratio test, we proposes a new intuitive subsampling-based test for the overall validity of the SRTR. The results indicate that serial dependence and heavy-tailedness may severely bias the applicability of SRTR, while jumps or volatility clustering may be less relevant. To mitigate the first-order effect from time dependence, we suggest a simple modified-SRTR for scaling tail risks. By examining 47 markets globally, we find the SRTR to be lenient, in that it generally yields downward-biased 10-day and 30-day VaRs, particularly in Eastern Europe, Central-South America, and the Asia Pacific. Nevertheless, accommodating the dependence correction is a notable improvement over the traditional SRTR.
Author(s)
Wang, Jying-Nan Sign in to follow this author
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