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Alternative statistical distributions for estimating value-at-risk: theory and evidence

  • Cheng-Few Lee

    ()

  • Jung-Bin Su

    ()

Registered author(s):

    A number of applications presume that asset returns are normally distributed, even though they are widely known to be skewed leptokurtic and fat-tailed and excess kurtosis. This leads to the underestimation or overestimation of the true value-at-risk (VaR). This study utilizes a composite trapezoid rule, a numerical integral method, for estimating quantiles on the skewed generalized t distribution (SGT) which permits returns innovation to flexibly treat skewness, leptokurtosis and fat tails. Daily spot prices of the thirteen stock indices in North America, Europe and Asia provide data for examining the one-day-ahead VaR forecasting performance of the GARCH model with normal, student’s t and SGT distributions. Empirical results indicate that the SGT provides a good fit to the empirical distribution of the log-returns followed by student’s t and normal distributions. Moreover, for all confidence levels, all models tend to underestimate real market risk. Furthermore, the GARCH-based model, with SGT distributional setting, generates the most conservative VaR forecasts followed by student’s t and normal distributions for a long position. Consequently, it appears reasonable to conclude that, from the viewpoint of accuracy, the influence of both skewness and fat-tails effects (SGT) is more important than only the effect of fat-tails (student’s t) on VaR estimates in stock markets for a long position. Copyright Springer Science+Business Media, LLC 2012

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    File URL: http://hdl.handle.net/10.1007/s11156-011-0256-x
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    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 39 (2012)
    Issue (Month): 3 (October)
    Pages: 309-331

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    Handle: RePEc:kap:rqfnac:v:39:y:2012:i:3:p:309-331
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