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Forecasting Value-at-Risk Using Nonlinear Regression Quantiles and the Intra-day Range

  • Cathy W. S. Chen

    (Graduate Institute of Statistics and Actuarial Science, Feng Chia University)

  • Richard Gerlach

    (University of Sydney Business School, Australia.)

  • Bruce B. K. Hwang

    (Graduate Institute of Statistics and Actuarial Science, Feng Chia University)

  • Michael McAleer

    (Econometrisch Instituut (Econometric Institute), Faculteit der Economische Wetenschappen (Erasmus School of Economics) Erasmus Universiteit, Tinbergen Instituut (Tinbergen Institute).)

Value-at-Risk (VaR) is commonly used for financial risk measurement. It has recently become even more important, especially during the 2008-09 global financial crisis. We pro- pose some novel nonlinear threshold conditional autoregressive VaR (CAViaR) models that incorporate intra-day price ranges. Model estimation and inference are performed using the Bayesian approach via the link with the Skewed-Laplace distribution. We examine how a range of risk models perform during the 2008-09 financial crisis, and evaluate how the crisis a ects the performance of risk models via forecasting VaR. Empirical analysis is conducted on five Asia-Pacific Economic Cooperation stock market indices as well as two exchange rate series. We examine violation rates, back-testing criteria, market risk charges and quantile loss function values to measure and assess the forecasting performance of a variety of risk models. The proposed threshold CAViaR model, incorporating range information, is shown to forecast VaR more eficiently than other models, across the series considered, which should be useful for financial practitioners.

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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 2011-16.

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Length: 40 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:ucm:doicae:1116
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  31. repec:syb:wpbsba:03/2011 is not listed on IDEAS
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