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Forecasting VaR and Expected Shortfall using Dynamical Systems: A Risk Management Strategy

  • Cyril Caillault

    (Fortis Investments - Fortis investments)

  • Dominique Guegan

    ()

    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

Using non-parametric and parametric models, we show that the bivariate distribution of an Asian portfolio is not stable along all the period under study. We suggest several dynamic models to compute two market risk measures, the Value at Risk and the Expected Shortfall: the RiskMetrics methodology, the Multivariate GARCH models, the Multivariate Markov-Switching models, the empirical histogram and the dynamic copulas. We discuss the choice of the best method with respect to the policy management of bank supervisors. The copula approach seems to be a good compromise between all these models. It permits taking financial crises into account and obtaining a low capital requirement during the most important crises.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00375765.

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Date of creation: Apr 2009
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Publication status: Published, Frontiers in finance and economics, 2009, 6, 1, 26-50
Handle: RePEc:hal:cesptp:halshs-00375765
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00375765
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  1. Dominique Guegan, 2004. "How Can We Define the Long Memory Concept? An Econometric Survey," Econometric Society 2004 Australasian Meetings 361, Econometric Society.
  2. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  3. Dominique Guegan, 2005. "How can we Define the Concept of Long Memory? An Econometric Survey," Econometric Reviews, Taylor & Francis Journals, vol. 24(2), pages 113-149.
  4. Dominique Guegan, 2007. "La persistance dans les marchés financiers," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00179269, HAL.
  5. Y. Malevergne & D. Sornette, 2001. "Testing the Gaussian Copula Hypothesis for Financial Assets Dependences," Finance 0111003, EconWPA.
  6. Dominique Guegan & Jing Zang, 2009. "Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market," The European Journal of Finance, Taylor & Francis Journals, vol. 15(7-8), pages 777-795.
  7. Manfred Gilli & Evis Këllezi & Hilda Hysi, . "A Data-Driven Optimization Heuristic for Downside Risk Minimization," Swiss Finance Institute Research Paper Series 06-02, Swiss Finance Institute.
  8. Fermanian, Jean-David, 2005. "Goodness-of-fit tests for copulas," Journal of Multivariate Analysis, Elsevier, vol. 95(1), pages 119-152, July.
  9. Thomas Mikosch & Catalin Starica, 2004. "Non-stationarities in financial time series, the long range dependence and the IGARCH effects," Econometrics 0412005, EconWPA.
  10. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  11. Cyril Caillault & Dominique Guegan, 2005. "Empirical Estimation of Tail Dependence Using Copulas. Application to Asian Markets," Post-Print halshs-00180865, HAL.
  12. Francq, C. & Zakoian, J. -M., 2001. "Stationarity of multivariate Markov-switching ARMA models," Journal of Econometrics, Elsevier, vol. 102(2), pages 339-364, June.
  13. Timo Terasvirta & Clive W.J Granger & Andrew Patton, 2003. "Common factors in conditional distributions for Bivariate time series," FMG Discussion Papers dp455, Financial Markets Group.
  14. Eric Jondeau & Michael Rockinger, 2002. "Conditional Dependency of Financial Series: The Copula-GARCH Model," FAME Research Paper Series rp69, International Center for Financial Asset Management and Engineering.
  15. Cyril Caillault & Dominique Guegan, 2009. "Forecasting VaR and Expected Shortfall using Dynamical Systems: A Risk Management Strategy," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00375765, HAL.
  16. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1443-1471, July.
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