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Value at risk models in finance

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  • Engle, Robert F.
  • Manganelli, Simone

Abstract

The main objective of this paper is to survey and evaluate the performance of the most popular univariate VaR methodologies, paying particular attention to their underlying assumptions and to their logical flaws. In the process, we show that the Historical Simulation method and its variants can be considered as special cases of the CAViaR framework developed by Engle and Manganelli (1999). We also provide two original methodological contributions. The first one introduces the extreme value theory into the CAViaR model. The second one concerns the estimation of the expected shortfall (the expected loss, given that the return exceeded the VaR) using a regression technique. The performance of the models surveyed in the paper is evaluated using a Monte Carlo simulation. We generate data using GARCH processes with different distributions and compare the estimated quantiles to the true ones. The results show that CAViaR models perform best with heavy-tailed DGP. JEL Classification: C22, G22

Suggested Citation

  • Engle, Robert F. & Manganelli, Simone, 2001. "Value at risk models in finance," Working Paper Series 75, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:200175
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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