Time-varying conditional Johnson SU density in value-at-risk (VaR) methodology
AbstractStylized facts on financial time series data are the volatility of returns that follow non-normal conditions such as leverage effects and heavier tails leading returns to have heavier magnitudes of extreme losses. Value-at-risk is a standard method of forecasting possible future losses in investments. A procedure of estimating value-at-risk using time-varying conditional Johnson SU¬ distribution is introduced and assessed with econometric models. The Johnson distribution offers the ability to model higher parameters with time-varying structure using maximum likelihood estimation techniques. Two procedures of modeling with the Johnson distribution are introduced: joint estimation of the volatility and two-step procedure where estimation of the volatility is separate from the estimation of higher parameters. The procedures were demonstrated on Philippine-foreign exchange rates and the Philippine stock exchange index. They were assessed with forecast evaluation measures with comparison to different value-at-risk methodologies. The research opens up modeling procedures where manipulation of higher parameters can be integrated in the value-at-risk methodology.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 36206.
Date of creation: Jan 2012
Date of revision:
Time Varying Parameters; GARCH models; Nonnormal distributions; Risk Management;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-20 (All new papers)
- NEP-ECM-2012-02-20 (Econometrics)
- NEP-FOR-2012-02-20 (Forecasting)
- NEP-ORE-2012-02-20 (Operations Research)
- NEP-RMG-2012-02-20 (Risk Management)
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