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Semi-parametric Dynamic Asymmetric Laplace Models for Tail Risk Forecasting, Incorporating Realized Measures

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  • Richard Gerlach
  • Chao Wang

Abstract

The joint Value at Risk (VaR) and expected shortfall (ES) quantile regression model of Taylor (2017) is extended via incorporating a realized measure, to drive the tail risk dynamics, as a potentially more efficient driver than daily returns. Both a maximum likelihood and an adaptive Bayesian Markov Chain Monte Carlo method are employed for estimation, whose properties are assessed and compared via a simulation study; results favour the Bayesian approach, which is subsequently employed in a forecasting study of seven market indices and two individual assets. The proposed models are compared to a range of parametric, non-parametric and semi-parametric models, including GARCH, Realized-GARCH and the joint VaR and ES quantile regression models in Taylor (2017). The comparison is in terms of accuracy of one-day-ahead Value-at-Risk and Expected Shortfall forecasts, over a long forecast sample period that includes the global financial crisis in 2007-2008. The results favor the proposed models incorporating a realized measure, especially when employing the sub-sampled Realized Variance and the sub-sampled Realized Range.

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  • Richard Gerlach & Chao Wang, 2018. "Semi-parametric Dynamic Asymmetric Laplace Models for Tail Risk Forecasting, Incorporating Realized Measures," Papers 1805.08653, arXiv.org.
    • Handle: RePEc:arx:papers:1805.08653
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    Cited by:

    1. Zhengkun Li & Minh-Ngoc Tran & Chao Wang & Richard Gerlach & Junbin Gao, 2020. "A Bayesian Long Short-Term Memory Model for Value at Risk and Expected Shortfall Joint Forecasting," Papers 2001.08374, arXiv.org, revised May 2021.

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