A Bayesian Confidence Interval for Value-at-Risk
AbstractThis study assesses the accuracy of the value-at-risk estimate (VaR). On the basis of posterior distributions of the unknown population parameters, we develop a confidence interval for VaR that reflects the genuine information available about the portfolios for which the VaR is calculated. This approach is more accurate than that in Dowd (2000) as it avoids explaining the behaviour of the population parameters on the basis of distributions of sample parameters. We find that the accuracy of both the confidence interval and the VaR estimate depend more dramatically on the sample size than what Dowd’s results suggest. In addition, we not only find that the impact of the confidence level and the holding period at which the VaR is predicated are negligible compared to that of the sample size (as in Dowd), but also that the confidence interval is far from being symmetric.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0348.
Date of creation: Nov 2003
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Web page: http://www.econ.cam.ac.uk/index.htm
Bayesian Statistics; Confidence Interval; Monte Carlo Simulations; Value-at-Risk;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- G00 - Financial Economics - - General - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-07-04 (All new papers)
- NEP-ECM-2004-07-17 (Econometrics)
- NEP-ETS-2004-07-04 (Econometric Time Series)
- NEP-FIN-2004-07-04 (Finance)
- NEP-RMG-2004-07-04 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Peter K. Cornelius, 2000. "Trade in Financial Services, Capital Flows, and the Value-at-Risk of Countries," The World Economy, Wiley Blackwell, vol. 23(5), pages 649-672, 05.
- Cornelius, Peter K., 2000. "Trade in financial services, capital flows, and the value-at-risk of countries," Research Notes 00-2, Deutsche Bank Research.
- Frost, Peter A. & Savarino, James E., 1986. "An Empirical Bayes Approach to Efficient Portfolio Selection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 293-305, September.
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