Range-Based Models in Estimating Value-at-Risk (VaR)
AbstractThis paper introduces new methods of estimating Value-at-Risk (VaR) using Range-Based GARCH (General Autoregressive Conditional Heteroskedasticity) models. These models, which could be either based on the Parkinson Range or Garman-Klasss Range, are applied to 10 stock market indices of selected countries in the Asia-Pacific Region. The results are compared using the traditional methods such as the econometric method based on the ARMA-GARCH models and RiskMetricsTM. The performance of the different models is assessed using the out-of-sample VaR forecasts. Series of likelihood ratio (LR) tests namely: LR of unconditional coverage (LRuc), LR of independence (LRind), and LR of conditional coverage (LRcc) are performed for comparison. The result of the assessment shows that the model based on the Parkinson Range GARCH (1,1) with Student’s t distribution is the best performing model on the 10 stock market indices. It has a failure rate, defined as the percentage of actual return that is smaller than the one-step-ahead VaR forecast, of zero in 9 out 10 stock market indices. The finding of this paper is that Range-Based GARCH Models are good alternatives in modeling volatility and in estimating VaR.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 21223.
Date of creation: 2008
Date of revision:
Publication status: Published in The Philippine Review of Economics 2.XLV(2008): pp. 87-100
Value-at-Risk (VaR); Parkinson Range; Garman-Klasss Range; Range-Based GARCH (General Autoregressive Conditional Heteroskedasticity);
Other versions of this item:
- Nikkin L. Beronilla & Dennis S. Mapa, 2008. "Range-based models in estimating value-at-risk (VaR)," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 45(2), pages 87-99, December.
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
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