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Forecasting VaR and Expected Shortfall Using Dynamical Systems: A Risk Management Strategy

  • Cyril Caillault, Dominique Guégan

    ()

    (Fortis Investments, London)

Using non-parametric and parametric models, we show that the bivariate distribution of an Asian portfolio is not stable along all the period under study. We suggest several dynamic models to compute two market risk measures, the Value at Risk and the Expected Shortfall: the RiskMetrics methodology, the Multivariate GARCH models, the Multivariate Markov-Switching models, the empirical histogram and the dynamic copulas. We discuss the choice of the best method with respect to the policy management of bank supervisors. The copula approach seems to be a good compromise between all these models. It permits taking financial crises into account and obtaining a low capital requirement during the most important crises.

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Article provided by SKEMA Business School in its journal Frontiers in Finance and Economics.

Volume (Year): 6 (2009)
Issue (Month): 1 (April)
Pages: 26-50

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Handle: RePEc:ffe:journl:v:6:y:2009:i:1:p:26-50
Contact details of provider: Web page: http://www.ffe.esc-lille.com

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  3. Dominique Guegan, 2005. "How can we define the concept of long memory ? An econometric survey," Post-Print halshs-00179343, HAL.
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  5. Cyril Caillault, Dominique Guégan, 2009. "Forecasting VaR and Expected Shortfall Using Dynamical Systems: A Risk Management Strategy," Frontiers in Finance and Economics, SKEMA Business School, vol. 6(1), pages 26-50, April.
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  16. Eric Jondeau & Michael Rockinger, 2002. "Conditional Dependency of Financial Series: The Copula-GARCH Model," FAME Research Paper Series rp69, International Center for Financial Asset Management and Engineering.
  17. M. Gilli & E. Kellezi & H. Hysi, 2006. "A Data-Driven Optimization Heuristic for Downside Risk Minimization," Computing in Economics and Finance 2006 355, Society for Computational Economics.
  18. Dominique Guegan, 2004. "How Can We Define the Long Memory Concept? An Econometric Survey," Econometric Society 2004 Australasian Meetings 361, Econometric Society.
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