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Forecasting Value-at-Risk Using Nonlinear Regression Quantiles and the Intra-day Range

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  • Cathy W. S. Chen
  • Richard Gerlach
  • Bruce B. K. Hwang
  • Michael McAleer

    ()
    (University of Canterbury)

Abstract

Value-at-Risk (VaR) is commonly used for financial risk measurement. It has recently become even more important, especially during the 2008-09 global financial crisis. We propose some novel nonlinear threshold conditional autoregressive VaR (CAViaR) models that incorporate intra-day price ranges. Model estimation and inference are performed using the Bayesian approach via the link with the Skewed-Laplace distribution. We examine how a range of risk models perform during the 2008-09 financial crisis, and evaluate how the crisis affects the performance of risk models via forecasting VaR. Empirical analysis is conducted on five Asia-Pacific Economic Cooperation stock market indices as well as two exchange rate series. We examine violation rates, back-testing criteria, market risk charges and quantile loss function values to measure and assess the forecasting performance of a variety of risk models. The proposed threshold CAViaR model, incorporating range information, is shown to forecast VaR more efficiently than other models, across the series considered, which should be useful for financial practitioners.

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File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1122.pdf
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Bibliographic Info

Paper provided by University of Canterbury, Department of Economics and Finance in its series Working Papers in Economics with number 11/22.

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Length: 41 pages
Date of creation: 18 May 2011
Date of revision:
Handle: RePEc:cbt:econwp:11/22

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Keywords: Value-at-Risk; CAViaR model; Skewed-Laplace distribution; intra-day range; backtesting; Markov chain Monte Carlo;

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References

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Cited by:
  1. Fuertes, Ana-Maria & Olmo, Jose, 2013. "Optimally harnessing inter-day and intra-day information for daily value-at-risk prediction," International Journal of Forecasting, Elsevier, Elsevier, vol. 29(1), pages 28-42.

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