Using Value-at-Risk to Estimate Downside Residential Market Risk
Conditional Value-at-Risk (VaR) is currently used by the banking industry to measure market risk as it relates to equity risk, currency risk, interest rate risk and commodity risk. We estimate the downside market risk in residential housing using various conditional volatility models. Although there is controversy surrounding the use of VaR as a risk management tool, we attempt to mitigate these concerns using various approaches in assumptions and modeling. Furthermore, an alternative portfolio is constructed minimizing VaR exposure as a portfolio constraint. We find that the conditional volatility models are especially useful when the current downside residential market risk is time-period dependent because the traditional risk measure based on a longer time series is less influenced by short-term extremes.
Volume (Year): 33 (2011)
Issue (Month): 3 ()
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