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Forecasting Value-at-Risk Using the Markov-Switching ARCH Model

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Author Info
Wei-Ting Tang
Yin-Feng Gau

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Abstract

This paper analyzes the application of the Markov-switching ARCH model (Hamilton and Susmel, 1994) in improving value-at-risk (VaR) forecast. By considering a mixture of normal distributions with varying variances over different time and regimes, we find that the “spurious high persistence†found in the GARCH model is adjusted. Under relative performance and hypothesis-testing evaluations, the VaR forecasts derived from the Markov-switching ARCH model are preferred to alternative parametric and nonparametric VaR models that only consider time-varying volatility. JEL classification: C22, C52, G28. Keywords: Value-at-Risk, Switching-regime ARCH models.

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 715.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:715

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Related research
Keywords: Value-at-Risk; Switching-regime ARCH models;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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  1. Ang, Andrew & Bekaert, Geert, 2002. "Regime Switches in Interest Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 163-82, April.
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  2. Lawrence R. Glosten & Ravi Jagannathan & David E. Runkle, 1993. "On the relation between the expected value and the volatility of the nominal excess return on stocks," Staff Report 157, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  3. Robert Engle & Simone Manganelli, 1999. "CAViaR: Conditional Autoregressive Value at Risk by Regression Quantiles," University of California at San Diego, Economics Working Paper Series 1999-20, Department of Economics, UC San Diego. [Downloadable!]
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