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Cyclicality and Term Structure of Value-at-Risk in Europe

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  • Bec, Frédérique
  • Gollier, Christian

Abstract

This paper explores empirically the link between stocks returns Value-at-Risk (VaR) and the state of financial markets cycle. The econometric analysis is based on a simple vector autoregression setup. Using quarterly data from 1970Q4 to 2008Q4 for France, Germany and the United-Kingdom, it turns out that the k-year VaR of equities is actually dependent on the cycle phase: the expected losses as measured by the VaR are smaller in recession times than expansion periods, whatever the country and the horizon. These results strongly suggest that the European rules regarding the solvency capital requirements for insurance companies should adapt to the state of the financial market’s cycle.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 587.

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Date of creation: May 2009
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Handle: RePEc:ide:wpaper:20628

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  1. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, 02.
  2. Lubos Pastor & Robert F. Stambaugh, 2009. "Are Stocks Really Less Volatile in the Long Run?," NBER Working Papers 14757, National Bureau of Economic Research, Inc.
  3. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
  4. Anders Møller Christensen & Heino Bohn Nielsen, 2009. "Monetary Policy in the Greenspan Era: A Time Series Analysis of Rules vs. Discretion," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 69-89, 02.
  5. Giuseppe Cavaliere & Anders Rahbek & A. M. Robert Taylor, 2007. "Testing for co-integration in vector autoregressions with non-stationary volatility," Discussion Papers 07/02, University of Nottingham, Granger Centre for Time Series Econometrics.
  6. Timothy Cogley & James M. Nason, 1991. "Effects of the Hodrick-Prescott filter on integrated time series," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  7. Guillaume Plantin & Haresh Sapra & Hyun Song Shin, 2008. "Marking-to-Market: Panacea or Pandora's Box?," Journal of Accounting Research, Wiley Blackwell, vol. 46(2), pages 435-460, 05.
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Cited by:
  1. J.-C. Bricongne & J.-M. Fournier & V. Lapègue & O. Monso, 2011. "From the financial crisis to the economic crisis The impact of the financial trouble of 2007-2008 on the growth of seven advanced countries," Documents de Travail de la DESE - Working Papers of the DESE g2011-05, Institut National de la Statistique et des Etudes Economiques, DESE.

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