An Evaluation Framework for Alternative VaR Models
AbstractIn this Paper we investigate the ability of different models to produce useful VaR-estimates for exchange rate positions. We make a distinction between models that include sophisticated tail properties and models that do not. The former type of models often leads to too extreme VaR-estimates, whereas the latter type underestimates the risk in case of extreme events. Our analysis shows that it is important to take into account parameter uncertainty, since this leads to uncertainty in the reported VaR. We make this uncertainty in the VaR explicit by means of simulation. Our empirical results suggest that more sophisticated tail-modeling approaches come at the cost of more uncertainty about the VaR estimate itself. In the case of the GARCH(1,1)-Student-t model the average VaR may be adjusted for parameter uncertainty to arrive at levels which are adequate according to out-of-sample tests.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3403.
Date of creation: Jun 2002
Date of revision:
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- Bams, Dennis & Lehnert, Thorsten & Wolff, Christian C.P., 2005. "An evaluation framework for alternative VaR-models," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(6), pages 944-958, October.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-02-18 (All new papers)
- NEP-CFN-2003-02-18 (Corporate Finance)
- NEP-ECM-2003-02-26 (Econometrics)
- NEP-FIN-2003-02-18 (Finance)
- NEP-FMK-2003-02-18 (Financial Markets)
- NEP-IFN-2003-02-18 (International Finance)
- NEP-RMG-2003-02-18 (Risk Management)
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