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CVaR sensitivity with respect to tail thickness

  • Stoyanov, Stoyan V.
  • Rachev, Svetlozar T.
  • Fabozzi, Frank J.

We consider the sensitivity of conditional value-at-risk (CVaR) with respect to the tail index assuming regularly varying tails and exponential and faster-than-exponential tail decay for the return distribution. We compare it to the CVaR sensitivity with respect to the scale parameter for stable Paretian, the Student's t, and generalized Gaussian laws and discuss implications for the modeling of daily returns and marginal rebalancing decisions. Finally, we explore empirically the impact on the asymptotic variability of the CVaR estimator with daily returns which is a standard choice for the return frequency for risk estimation.

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Paper provided by Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering in its series Working Paper Series in Economics with number 29.

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Date of creation: 2011
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Handle: RePEc:zbw:kitwps:29
Contact details of provider: Web page: http://www.wiwi.kit.edu/
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  1. Kim, Young Shin & Rachev, Svetlozar T. & Bianchi, Michele Leonardo & Fabozzi, Frank J., 2011. "Tempered stable and tempered infinitely divisible GARCH models," Working Paper Series in Economics 28, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
  2. Keith Kuester & Stefan Mittnik & Marc S. Paolella, 2006. "Value-at-Risk Prediction: A Comparison of Alternative Strategies," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(1), pages 53-89.
  3. Chen, Carl R. & Su, Yuli & Huang, Ying, 2008. "Hourly index return autocorrelation and conditional volatility in an EAR-GJR-GARCH model with generalized error distribution," Journal of Empirical Finance, Elsevier, vol. 15(4), pages 789-798, September.
  4. Haas, Markus & Mittnik, Stefan & Paolella, Marc S., 2005. "Modeling and predicting market risk with Laplace-Gaussian mixture distributions," CFS Working Paper Series 2005/11, Center for Financial Studies (CFS).
  5. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
  6. Mittnik, Stefan & Paolella, Marc S. & Rachev, Svetlozar T., 2002. "Stationarity of stable power-GARCH processes," Journal of Econometrics, Elsevier, vol. 106(1), pages 97-107, January.
  7. Mittnik, Stefan & Paolella, Marc S., 2003. "Prediction of Financial Downside-Risk with Heavy-Tailed Conditional Distributions," CFS Working Paper Series 2003/04, Center for Financial Studies (CFS).
  8. L. Jeff Hong & Guangwu Liu, 2009. "Simulating Sensitivities of Conditional Value at Risk," Management Science, INFORMS, vol. 55(2), pages 281-293, February.
  9. Kim, Young Shin & Rachev, Svetlozar T. & Bianchi, Michele Leonardo & Fabozzi, Frank J., 2008. "Financial market models with Lévy processes and time-varying volatility," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1363-1378, July.
  10. Michael Grabchak & Gennady Samorodnitsky, 2010. "Do financial returns have finite or infinite variance? A paradox and an explanation," Quantitative Finance, Taylor & Francis Journals, vol. 10(8), pages 883-893.
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