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Optimisation of Decay Factor in Time Weighted (Brw) Simulation: Implications for Var Performance in Mediterranean Countries

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  • Saša Žiković
  • Zdenko Prohaska

Abstract

In this paper we propose an optimisation approach to determining the optimal decay factor in time weighted (BRW) simulation. Testing of BRW simulation with different decay factors and competing VaR models is performed on a sample of nine Mediterranean countries, over a four year period that includes the ongoing financial crisis. After optimisation the BRW simulation is among the best performing tested VaR models, second only to EVT approaches. Optimising the decay factor in regards to Lopez function results in decay factor estimates that are higher than usually employed 0.97 and 0.99. The optimal decay factors are stable over time and provide significantly better backtesting results than the standard assumptions.

Suggested Citation

  • Saša Žiković & Zdenko Prohaska, 2010. "Optimisation of Decay Factor in Time Weighted (Brw) Simulation: Implications for Var Performance in Mediterranean Countries," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 23(1), pages 73-85, January.
    • Handle: RePEc:taf:reroxx:v:23:y:2010:i:1:p:73-85
    DOI: 10.1080/1331677X.2010.11517402
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    Cited by:

    1. Nikola RADIVOJEVIĆ & Luka FILIPOVI & Тomislav D. BRZAKOVIĆ, 2020. "A New Semiparametric Mirrored Historical Simulation Value-At-Risk Model," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 5-21, March.

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