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Semiparametric GARCH models with long memory applied to Value at Risk and Expected Shortfall

Author

Listed:
  • Sebastian Letmathe

    (Paderborn University)

  • Yuanhua Feng

    (Paderborn University)

  • André Uhde

    (Paderborn University)

Abstract

In this paper new semiparametric GARCH models with long memory are in- troduced. The estimation of the nonparametric scale function is carried out by an adapted version of the SEMIFAR algorithm (Beran et al., 2002). Recurring on the revised recommendations by the Basel Committee to measure market risk in the banks' trading books (Basel Committee on Banking Supervision, 2013), the semi- parametric GARCH models are applied to obtain rolling one-step ahead forecasts for the Value at Risk (VaR) and Expected Shortfall (ES) for market risk assets. In addition, standard regulatory traffic light tests (Basel Committee on Banking Supervision, 1996) and a newly introduced traffic light test for the ES are carried out for all models. The practical relevance of our proposal is demonstrated by a comparative study. Our results indicate that semiparametric long memory GARCH models are an attractive alternative to their conventional, parametric counterparts.

Suggested Citation

  • Sebastian Letmathe & Yuanhua Feng & André Uhde, 2021. "Semiparametric GARCH models with long memory applied to Value at Risk and Expected Shortfall," Working Papers CIE 141, Paderborn University, CIE Center for International Economics.
    • Handle: RePEc:pdn:ciepap:141
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Semiparametric; long memory; GARCH models; forecasting; Value at Risk; Expected Shortfall; traffic light test; Basel Committee on Banking Supervision;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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