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Forecasting VaR and Expected Shortfall Using Dynamical Systems: A Risk Management Strategy

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Author Info

  • Cyril Caillault, Dominique Guégan

    () (Fortis Investments, London)

Abstract

Using non-parametric and parametric models, we show that the bivariate distribution of an Asian portfolio is not stable along all the period under study. We suggest several dynamic models to compute two market risk measures, the Value at Risk and the Expected Shortfall: the RiskMetrics methodology, the Multivariate GARCH models, the Multivariate Markov-Switching models, the empirical histogram and the dynamic copulas. We discuss the choice of the best method with respect to the policy management of bank supervisors. The copula approach seems to be a good compromise between all these models. It permits taking financial crises into account and obtaining a low capital requirement during the most important crises.

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Bibliographic Info

Article provided by SKEMA Business School in its journal Frontiers in Finance and Economics.

Volume (Year): 6 (2009)
Issue (Month): 1 (April)
Pages: 26-50

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Handle: RePEc:ffe:journl:v:6:y:2009:i:1:p:26-50

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Web page: http://www.ffe.esc-lille.com

Related research

Keywords: Value at risk; expected shortfall; copulas; risk management; GARCH models; Markov switching models;

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References

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  1. Y. Malevergne & D. Sornette, 2003. "Testing the Gaussian copula hypothesis for financial assets dependences," Quantitative Finance, Taylor and Francis Journals, vol. 3(4), pages 231-250.
  2. Christian Francq & Jean-Michel Zakoïan, 2000. "Stationarity of Multivariate Markov-Switching ARMA Models," Working Papers 2000-32, Centre de Recherche en Economie et Statistique.
  3. Cyril Caillault & Dominique Guegan, 2005. "Empirical estimation of tail dependence using copulas: application to Asian markets," Quantitative Finance, Taylor and Francis Journals, vol. 5(5), pages 489-501.
  4. Peter F. Christoffersen & Francis X. Diebold & Til Schuermann, 1998. "Horizon problems and extreme events in financial risk management," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 109-118.
  5. Cyril Caillault & Dominique Guegan, 2005. "Empirical Estimation of Tail Dependence Using Copulas. Application to Asian Markets," Post-Print halshs-00180865, HAL.
  6. Thomas Mikosch & Catalin Starica, 2004. "Non-stationarities in financial time series, the long range dependence and the IGARCH effects," Econometrics 0412005, EconWPA.
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  8. Dominique Guegan, 2005. "How can we define the concept of long memory ? An econometric survey," Post-Print halshs-00179343, HAL.
  9. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  10. Manfred Gilli & Evis Këllezi & Hilda Hysi, . "A Data-Driven Optimization Heuristic for Downside Risk Minimization," Swiss Finance Institute Research Paper Series 06-02, Swiss Finance Institute.
  11. Fermanian, Jean-David, 2005. "Goodness-of-fit tests for copulas," Journal of Multivariate Analysis, Elsevier, vol. 95(1), pages 119-152, July.
  12. Cyril Caillault & Dominique Guegan, 2009. "Forecasting VaR and Expected Shortfall using Dynamical Systems: A Risk Management Strategy," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00375765, HAL.
  13. Raymond Brummelhuis & Dominique Guegan, 2005. "Multi-period conditional distribution functions for heteroscedastic models with applications to VaR," Post-Print halshs-00179336, HAL.
  14. Timo Terasvirta & Clive W.J Granger & Andrew Patton, 2003. "Common factors in conditional distributions for Bivariate time series," FMG Discussion Papers dp455, Financial Markets Group.
  15. Dominique Guegan & Jing Zhang, 2009. "Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00368336, HAL.
  16. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
  17. Eric Jondeau & Michael Rockinger, 2002. "Conditional Dependency of Financial Series: The Copula-GARCH Model," FAME Research Paper Series rp69, International Center for Financial Asset Management and Engineering.
  18. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  19. Dominique Guegan, 2005. "How can we Define the Concept of Long Memory? An Econometric Survey," Econometric Reviews, Taylor and Francis Journals, vol. 24(2), pages 113-149.
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Citations

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Cited by:
  1. repec:hal:journl:halshs-00460901 is not listed on IDEAS
  2. Dominique Guegan & Wayne Tarrant, 2012. "On the Necessity of Five Risk Measures," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00721339, HAL.
  3. Dominique Guegan & Wayne Tarrant, 2012. "Viewing Risk Measures as information," Working Papers halshs-00721350, HAL.
  4. Raúl de Jesús, Edgar Ortiz, 2011. "Risk in Emerging Stock Markets from Brazil and Mexico: Extreme Value Theory and Alternative Value at Risk Models," Frontiers in Finance and Economics, SKEMA Business School, vol. 8(2), pages 49-88, October.
  5. Dominique Gu\'egan & Wayne Tarrant, 2011. "On the Necessity of Five Risk Measures," Papers 1111.4414, arXiv.org.
  6. Dominique Guegan & Wayne Tarrant, 2012. "On the Necessity of Five Risk Measures," Working Papers halshs-00721339, HAL.
  7. Dominique Gu/'egan & Wayne Tarrant, 2011. "Viewing Risk Measures as Information," Papers 1111.4417, arXiv.org.
  8. Dominique Guégan, 2009. "A Meta-Distribution for Non-Stationary Samples," CREATES Research Papers 2009-24, School of Economics and Management, University of Aarhus.
  9. Dominique Guegan & Wayne Tarrant, 2011. "Viewing Risk Measures as information," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00639489, HAL.
  10. Cyril Caillault & Dominique Guegan, 2005. "Empirical estimation of tail dependence using copulas: application to Asian markets," Quantitative Finance, Taylor and Francis Journals, vol. 5(5), pages 489-501.
  11. Dominique Guegan & Wayne Tarrant, 2012. "Viewing Risk Measures as information," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00721350, HAL.
  12. Cyril Caillault & Dominique Guegan, 2009. "Forecasting VaR and Expected Shortfall using Dynamical Systems: A Risk Management Strategy," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00375765, HAL.
  13. Dominique Guegan & Wayne Tarrant, 2011. "Viewing Risk Measures as information," Post-Print halshs-00639489, HAL.
  14. Dominique Guegan & Wayne Tarrant, 2011. "Viewing risk measures as information," Documents de travail du Centre d'Economie de la Sorbonne 11054, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.

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