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Forecasting Value-at-Risk under Temporal and Portfolio Aggregation

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  • Erik Kole
  • Thijs Markwat
  • Anne Opschoor
  • Dick van Dijk

Abstract

We examine the impact of temporal and portfolio aggregation on the quality of Value-at-Risk (VaR) forecasts over a horizon of 10 trading days for a well-diversified portfolio of stocks, bonds and alternative investments. The VaR forecasts are constructed based on daily, weekly, or biweekly returns of all constituent assets separately, gathered into portfolios based on asset class, or into a single portfolio. We compare the impact of aggregation with that of choosing a model for the conditional volatilities and correlations, the distribution for the innovations, and the method of forecast construction. We find that the level of temporal aggregation is most important. Daily returns form the best basis for VaR forecasts. Modeling the portfolio at the asset or asset class level works better than complete portfolio aggregation, but differences are smaller. The differences from the model, distribution, and forecast choices are also smaller compared with temporal aggregation.

Suggested Citation

  • Erik Kole & Thijs Markwat & Anne Opschoor & Dick van Dijk, 2017. "Forecasting Value-at-Risk under Temporal and Portfolio Aggregation," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 15(4), pages 649-677.
  • Handle: RePEc:oup:jfinec:v:15:y:2017:i:4:p:649-677.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbx019
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    More about this item

    Keywords

    aggregation; forecast evaluation; model comparison; value-at-risk;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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