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Incorporating higher moments into value-at-risk forecasting

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Author Info

  • Arnold Polanski

    (Queen's University Management School, Belfast, UK)

  • Evarist Stoja

    (School of Economics, Finance and Management, University of Bristol, UK)

Abstract

Value-at-risk (VaR) forecasting generally relies on a parametric density function of portfolio returns that ignores higher moments or assumes them constant. In this paper, we propose a simple approach to forecasting of a portfolio VaR. We employ the Gram-Charlier expansion (GCE) augmenting the standard normal distribution with the first four moments, which are allowed to vary over time. In an extensive empirical study, we compare the GCE approach to other models of VaR forecasting and conclude that it provides accurate and robust estimates of the realized VaR. In spite of its simplicity, on our dataset GCE outperforms other estimates that are generated by both constant and time-varying higher-moments models. Copyright © 2009 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.1155
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 29 (2010)
Issue (Month): 6 ()
Pages: 523-535

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Handle: RePEc:jof:jforec:v:29:y:2010:i:6:p:523-535

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

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Cited by:
  1. Del Brio, Esther B. & Perote, Javier, 2012. "Gram–Charlier densities: Maximum likelihood versus the method of moments," Insurance: Mathematics and Economics, Elsevier, vol. 51(3), pages 531-537.
  2. Abad, Pilar & Benito, Sonia, 2013. "A detailed comparison of value at risk estimates," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 94(C), pages 258-276.
  3. Pilar Abad & Sonia Benito & Miguel Angel Sánchez Granero & Carmen López, 2013. "A Capital Adequacy Buffer Model," Documentos de Trabajo del ICAE 2013-40, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  4. Olivier Bos & Béatrice Roussillon & Paul Schweinzer, 2013. "Agreeing on Efficient Emissions Reduction," CESifo Working Paper Series 4345, CESifo Group Munich.

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