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Single-index and portfolio models for forecasting value-at-risk thresholds

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Author Info
Michael McAleer (School of Economics and Commerce, University of Western Australia)
Bernardo da Veiga (School of Economics and Commerce, University of Western Australia)

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Abstract

The variance of a portfolio can be forecast using a single index model or the covariance matrix of the portfolio. Using univariate and multivariate conditional volatility models, this paper evaluates the performance of the single index and portfolio models in forecasting value-at-risk (VaR) thresholds of a portfolio. Likelihood ratio tests of unconditional coverage, independence and conditional coverage of the VaR forecasts suggest that the single-index model leads to excessive and often serially dependent violations, while the portfolio model leads to too few violations. The single-index model also leads to lower daily Basel Accord capital charges. The univariate models which display correct conditional coverage lead to higher capital charges than models which lead to too many violations. Overall, the Basel Accord penalties appear to be too lenient and favour models which have too many violations. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.1054
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 27 (2008)
Issue (Month): 3 ()
Pages: 217-235
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:jof:jforec:v:27:y:2008:i:3:p:217-235

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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  1. Michael McAleer & Juan-Angel Jimenez-Martin & Teodosio Perez-Amaral, 2009. "What Happened to Risk Management During the 2008-09 Financial Crisis?," CIRJE F-Series CIRJE-F-636, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
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  2. Michael McAleer & Juan-Angel Jimenez-Martin & Teodosio Pérez-Amaral, . "Has the Basel II Accord Encouraged Risk Management During the 2008-09 Financial Crisis?," Tinbergen Institute Discussion Papers 09-039/4, Tinbergen Institute. [Downloadable!]
    Other versions:
  3. Michael McAleer & Juan-Angel Jimenez-Martin & Teodosio Perez-Amaral, 2009. "A Decision Rule to Minimize Daily Capital Charges in Forecasting Value-at-Risk," CIRJE F-Series CIRJE-F-644, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
    Other versions:
  4. Jose Angelo Divino & Michael McAleer, 2009. "Modelling and Forecasting Daily International Mass Tourism to Peru," CIRJE F-Series CIRJE-F-651, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
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