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Why does skewness and the fat-tail effect influence value-at-risk estimates? Evidence from alternative capital markets

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  • Su, Jung-Bin
  • Lee, Ming-Chih
  • Chiu, Chien-Liang

Abstract

In this study, the generalized autoregressive conditional heteroskedasticity (GARCH) model involving skewed generalized error distribution (SGED) was used to estimate the corresponding volatility and value-at-risk (VaR) measures for various commodities distributed across four types of commodity markets. The empirical results indicated that the return (volatility) of most of the assets distributed in alternative markets significantly decreased (increased) as a result of the global financial crisis. Conversely, the oil crisis yielded inconsistent results. Regarding the influences of both crises on return and volatility, the global financial crisis was more influential than the oil crisis was. Moreover, regarding confidence levels, the skewness effect existed among VaR estimations for only the long position, whereas the fat-tail effect existed among the VaR estimations for only high confidence levels, irrespective of whether a long or short position was traded. Finally, regarding the popular confidence levels in risk management, the SGED (GED) was the optimal return distribution setting for a long (short) position.

Suggested Citation

  • Su, Jung-Bin & Lee, Ming-Chih & Chiu, Chien-Liang, 2014. "Why does skewness and the fat-tail effect influence value-at-risk estimates? Evidence from alternative capital markets," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 59-85.
    • Handle: RePEc:eee:reveco:v:31:y:2014:i:c:p:59-85
    DOI: 10.1016/j.iref.2013.12.001
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    Cited by:

    1. Chen, Cathy Yi-Hsuan & Kuo, I-Doun, 2015. "Survey sentiment and interest rate option smile," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 125-137.

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    More about this item

    Keywords

    Value-at-Risk; GARCH models; Skewness effect; Fat-tail effect; Global financial crisis;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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