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Value-at-Risk analysis of stock returns: Historical simulation, varinace techniques or tail index estimation ?

Author

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  • R.W.J. van den Goorbergh
  • P.J.G. Vlaar

Abstract

In this paper various Value-at-Risk techniques are applied tot the Dutch stock market index AEX and to the Dow Jones Industrial Average. the main conclusions are: (1) Changing volatility over time is the most important characteristic of stock returns when modelling value-at-risk; (2) For high confidence levels, the fat tails of the distribution can best be modeled by means of the t-distribution, tail index estimators perform much worse; (3) The penalty scheme used to determine the capital requirement is not discriminating enough to give banks proper incentives.

Suggested Citation

  • R.W.J. van den Goorbergh & P.J.G. Vlaar, 1999. "Value-at-Risk analysis of stock returns: Historical simulation, varinace techniques or tail index estimation ?," WO Research Memoranda (discontinued) 579, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:579
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    File URL: https://www.dnb.nl/binaries/wo0579_tcm46-145908.pdf
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    References listed on IDEAS

    as
    1. Vlaar, Peter J G & Palm, Franz C, 1993. "The Message in Weekly Exchange Rates in the European Monetary System: Mean Reversion, Conditional Heteroscedasticity, and Jumps," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 351-360, July.
    2. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 39-69.
    3. Jon Danielsson & Casper G. de Vries, 1998. "Beyond the Sample: Extreme Quantile and Probability Estimation," FMG Discussion Papers dp298, Financial Markets Group.
    4. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
    5. M.J.B. Hall, 1996. "The amendment to the capital accord to incorporate market risk," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 49(197), pages 271-277.
    6. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    7. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, January.
    8. R.W.J. van den Goorbergh, 1999. "Value-at-Risk and least squares tail index estimation," WO Research Memoranda (discontinued) 578, Netherlands Central Bank, Research Department.
    9. de Haan, Laurens & Resnick, Sidney I. & Rootzén, Holger & de Vries, Casper G., 1989. "Extremal behaviour of solutions to a stochastic difference equation with applications to arch processes," Stochastic Processes and their Applications, Elsevier, vol. 32(2), pages 213-224, August.
    10. Vlaar, Peter J. G., 2000. "Value at risk models for Dutch bond portfolios," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1131-1154, July.
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    Citations

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    Cited by:

    1. Kóbor, Ádám, 2000. "A feltétel nélküli normalitás egyszerű alternatívái a kockáztatott érték számításában
      [The simple alternatives of unconditional normality in the calculation of value at risk]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 878-898.
    2. Hung, Jui-Cheng & Lee, Ming-Chih & Liu, Hung-Chun, 2008. "Estimation of value-at-risk for energy commodities via fat-tailed GARCH models," Energy Economics, Elsevier, vol. 30(3), pages 1173-1191, May.
    3. R.W.J. van den Goorbergh, 1999. "Value-at-Risk and least squares tail index estimation," WO Research Memoranda (discontinued) 578, Netherlands Central Bank, Research Department.
    4. Aloui, Chaker & Mabrouk, Samir, 2010. "Value-at-risk estimations of energy commodities via long-memory, asymmetry and fat-tailed GARCH models," Energy Policy, Elsevier, vol. 38(5), pages 2326-2339, May.
    5. Angelidis, Timotheos & Degiannakis, Stavros, 2005. "Modeling Risk for Long and Short Trading Positions," MPRA Paper 80467, University Library of Munich, Germany.
    6. Piñeiro, J. & Tamazian, A. & Melikyan, David N., 2006. "Consequences of the Euro introduction on Market Risk: An Econometric Evidence from 1995-2004," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 6(2).
    7. GIOT, Pierre, 2000. "Intraday value-at-risk," CORE Discussion Papers 2000045, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Timotheos Angelidis & Alexandros Benos & Stavros Degiannakis, 2007. "A robust VaR model under different time periods and weighting schemes," Review of Quantitative Finance and Accounting, Springer, vol. 28(2), pages 187-201, February.
    9. Sinha, Pankaj & Agnihotri, Shalini, 2014. "Sensitivity of Value at Risk estimation to NonNormality of returns and Market capitalization," MPRA Paper 56307, University Library of Munich, Germany, revised 26 May 2014.
    10. Timotheos Angelidis & Alexandros Benos, 2006. "Liquidity adjusted value-at-risk based on the components of the bid-ask spread," Applied Financial Economics, Taylor & Francis Journals, vol. 16(11), pages 835-851.
    11. Wielhouwer, J.L. & Bams, D., 2001. "Empirical issues in value at risk," Other publications TiSEM 50f816a0-cc36-447c-be83-c, Tilburg University, School of Economics and Management.
    12. Bank for International Settlements, 2000. "Stress Testing by Large Financial Institutions: Current Practice and Aggregation Issues," CGFS Papers, Bank for International Settlements, number 14.
    13. Giot, Pierre & Laurent, Sebastien, 2003. "Market risk in commodity markets: a VaR approach," Energy Economics, Elsevier, vol. 25(5), pages 435-457, September.
    14. Juan Pi??eiro Chousa, & Artur Tamazian, & Davit N. Melikyan,, 2008. "MARKET RISK DYNAMICS AND COMPETITIVENESS AFTER THE EURO: Evidence from EMU Members," William Davidson Institute Working Papers Series wp916, William Davidson Institute at the University of Michigan.
    15. PICIU, Gabriela Cornelia, 2013. "Internal Rating – An Active Instrument In The Management Of Banking Risks. Case Study Bcr," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 17(2), pages 21-30.
    16. virginie terraza & stephane mussard, 2007. "New trading risk indexes: application of the shapley value in finance," Economics Bulletin, AccessEcon, vol. 3(25), pages 1-7.

    More about this item

    Keywords

    Value-at-Risk; AEX; Dow Jones; Capital requirements;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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