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Backtesting Parametric Value-at-Risk With Estimation Risk

Backtesting Parametric Value-at-Risk With Estimation Risk
Author: Juan Carlos Escanciano
Publisher:
Total Pages: 39
Release: 2008
Genre:
ISBN:
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One of the implications of the creation of Basel Committee on Banking Supervision wasthe implementation of Value-at-Risk (VaR) as the standard tool for measuring market risk.Since then, the capital requirements of commercial banks with trading activities are basedon VaR estimates. Therefore, appropriately constructed tests for assessing the out-of-sampleforecast accuracy of the VaR model (backtesting procedures) have become of crucial practicalimportance. In this paper we show that the use of the standard unconditional and independencebacktesting procedures to assess VaR models in out-of-sample composite environmentscan be misleading. These tests do not consider the impact of estimation risk and thereforemay use wrong critical values to assess market risk. The purpose of this paper is to quantifysuch estimation risk in a very general class of dynamic parametric VaR models and tocorrect standard backtesting procedures to provide valid inference in out-of-sample analyses.A Monte Carlo study illustrates our theoretical findings in finite-samples and shows that ourcorrected unconditional test can provide more accurately sized and more powerful tests thanthe uncorrected one. Finally, an application to Samp;P500 Index shows the importance of thiscorrection and its impact on capital requirements as imposed by Basel Accord.

Measuring Market Risk with Value at Risk

Measuring Market Risk with Value at Risk
Author: Pietro Penza
Publisher: John Wiley & Sons
Total Pages: 324
Release: 2001
Genre: Business & Economics
ISBN: 9780471393139
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"This book, Measuring Market Risk with Value at Risk by Vipul Bansal and Pietro Penza, has three advantages over earlier works on the subject. First, it takes a decidedly global approach-an essential ingredient for any comprehensive work on market risk. Second, it ties the scientifically grounded, yet intuitively appealing, VaR measure to earlier, more idiosyncratic measures of market risk that are used in specific market environs (e.g., duration in fixed income). Finally, it encompasses all of the accepted approaches to calculating a VaR measure and presents them in a clearly explained fashion with supporting illustrations and completely worked-out examples." -from the Foreword by John F. Marshall, PhD, Principal, Marshall, Tucker & Associates, LLC "Measuring Market Risk with Value at Risk offers a much-needed intellectual bridge, a translation from the esoteric realm of mathematical finance to the domain of financial managers who seek guidance in applying developments from this important field of research as well as that of MBA-level graduate instruction. I believe the authors have done a commendable job of providing a carefully crafted, highly readable, and most useful work, and intend to recommend it to all those involved in business risk management applications." -Anthony F. Herbst, PhD, Professor of Finance and C.R. and D.S. Carter Chair, The University of Texas, El Paso and Founding editor of The Journal of Financial Engineering (1991-1998) "Finally there's a book that strikes a balance between rigor and application in the area of risk management in the banking industry. This innovative book is a MUST for both novices and professionals alike." -Robert P. Yuyuenyongwatana, PhD, Associate Professor of Finance, Cameron University "Measuring Market Risk with Value at Risk is one of the most complete discussions of this emerging topic in finance that I have seen. The authors develop a logical and rigorous framework for using VaR models, providing both historical references and analytical applications." -Kevin Wynne, PhD, Associate Professor of Finance, Lubin School of Business, Pace University

Value-at-Risk - Estimated with the Parametric Method

Value-at-Risk - Estimated with the Parametric Method
Author: Philip Deichmann
Publisher:
Total Pages:
Release: 2008
Genre:
ISBN:
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This paper estimates the risk in a portfolio consisting of 19 Danish Stocks from the OMXC20 index by means of the parametric method. Under an assumption of normal distributed returns a MA(20)-, MA(40)- and MA(60) model as well as an EWMA(0,94)-, EWMA(0,97)- and EWMA(0,99)-model is used to estimate the variance of the portfolio and calculate the Value-at-Risk. Over a 4 year-period, consisting of two back-testing periods of one year and two estimation periods of one and a half year each, back-testing is done. Using 5 different back-tests it is concluded that the EWMA(0,99)-model gives the optimal daily Value-at-Risk for the portfolio over the whole period.

Backtesting Value at Risk and Expected Shortfall

Backtesting Value at Risk and Expected Shortfall
Author: Simona Roccioletti
Publisher: Springer Gabler
Total Pages: 0
Release: 2015-12-11
Genre: Business & Economics
ISBN: 9783658119072
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In this book Simona Roccioletti reviews several valuable studies about risk measures and their properties; in particular she studies the new (and heavily discussed) property of "Elicitability" of a risk measure. More important, she investigates the issue related to the backtesting of Expected Shortfall. The main contribution of the work is the application of "Test 1" and "Test 2" developed by Acerbi and Szekely (2014) on different models and for five global market indexes.

Market Risk Analysis, Value at Risk Models

Market Risk Analysis, Value at Risk Models
Author: Carol Alexander
Publisher: John Wiley & Sons
Total Pages: 503
Release: 2009-02-09
Genre: Business & Economics
ISBN: 0470997885
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Written by leading market risk academic, Professor Carol Alexander, Value-at-Risk Models forms part four of the Market Risk Analysis four volume set. Building on the three previous volumes this book provides by far the most comprehensive, rigorous and detailed treatment of market VaR models. It rests on the basic knowledge of financial mathematics and statistics gained from Volume I, of factor models, principal component analysis, statistical models of volatility and correlation and copulas from Volume II and, from Volume III, knowledge of pricing and hedging financial instruments and of mapping portfolios of similar instruments to risk factors. A unifying characteristic of the series is the pedagogical approach to practical examples that are relevant to market risk analysis in practice. All together, the Market Risk Analysis four volume set illustrates virtually every concept or formula with a practical, numerical example or a longer, empirical case study. Across all four volumes there are approximately 300 numerical and empirical examples, 400 graphs and figures and 30 case studies many of which are contained in interactive Excel spreadsheets available from the the accompanying CD-ROM . Empirical examples and case studies specific to this volume include: Parametric linear value at risk (VaR)models: normal, Student t and normal mixture and their expected tail loss (ETL); New formulae for VaR based on autocorrelated returns; Historical simulation VaR models: how to scale historical VaR and volatility adjusted historical VaR; Monte Carlo simulation VaR models based on multivariate normal and Student t distributions, and based on copulas; Examples and case studies of numerous applications to interest rate sensitive, equity, commodity and international portfolios; Decomposition of systematic VaR of large portfolios into standard alone and marginal VaR components; Backtesting and the assessment of risk model risk; Hypothetical factor push and historical stress tests, and stress testing based on VaR and ETL.

Measuring Market Risk

Measuring Market Risk
Author: Kevin Dowd
Publisher: John Wiley & Sons
Total Pages: 410
Release: 2007-01-11
Genre: Business & Economics
ISBN: 0470016515
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Fully revised and restructured, Measuring Market Risk, Second Edition includes a new chapter on options risk management, as well as substantial new information on parametric risk, non-parametric measurements and liquidity risks, more practical information to help with specific calculations, and new examples including Q&A’s and case studies.

Backtesting Value at Risk and Expected Shortfall

Backtesting Value at Risk and Expected Shortfall
Author: Simona Roccioletti
Publisher: Springer
Total Pages: 155
Release: 2015-12-04
Genre: Business & Economics
ISBN: 365811908X
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In this book Simona Roccioletti reviews several valuable studies about risk measures and their properties; in particular she studies the new (and heavily discussed) property of "Elicitability" of a risk measure. More important, she investigates the issue related to the backtesting of Expected Shortfall. The main contribution of the work is the application of "Test 1" and "Test 2" developed by Acerbi and Szekely (2014) on different models and for five global market indexes.

Robust Backtesting Tests for Value-at-Risk Models

Robust Backtesting Tests for Value-at-Risk Models
Author: Juan Carlos Escanciano
Publisher:
Total Pages: 0
Release: 2009
Genre:
ISBN:
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Backtesting methods are statistical tests designed to uncover excessive risk-taking from financial institutions. We show in this paper that these methods are subject to the presence of model risk produced by a wrong specification of the conditional VaR model, and derive its effect on the asymptotic distribution of the relevant out-of-sample tests. We also show that in the absence of estimation risk, the unconditional backtest is affected by model misspecification but the independence test is not. Our solution for the general case consists on proposing robust subsampling techniques to approximate the true sampling distribution of these tests. We carry out a Monte Carlo study to see the importance of these effects in finite samples for location-scale models that are wrongly specified but correct on average. An application to Dow-Jones Index shows the impact of correcting for model risk on backtesting procedures for different dynamic VaR models measuring risk exposure.

Value at Risk, 3rd Ed.

Value at Risk, 3rd Ed.
Author: Philippe Jorion
Publisher: McGraw Hill Professional
Total Pages: 624
Release: 2006-11-09
Genre: Business & Economics
ISBN: 0071736921
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Since its original publication, Value at Risk has become the industry standard in risk management. Now in its Third Edition, this international bestseller addresses the fundamental changes in the field that have occurred across the globe in recent years. Philippe Jorion provides the most current information needed to understand and implement VAR-as well as manage newer dimensions of financial risk. Featured updates include: An increased emphasis on operational risk Using VAR for integrated risk management and to measure economic capital Applications of VAR to risk budgeting in investment management Discussion of new risk-management techniques, including extreme value theory, principal components, and copulas Extensive coverage of the recently finalized Basel II capital adequacy rules for commercial banks, integrated throughout the book A major new feature of the Third Edition is the addition of short questions and exercises at the end of each chapter, making it even easier to check progress. Detailed answers are posted on the companion web site www.pjorion.com/var/. The web site contains other materials, including additional questions that course instructors can assign to their students. Jorion leaves no stone unturned, addressing the building blocks of VAR from computing and backtesting models to forecasting risk and correlations. He outlines the use of VAR to measure and control risk for trading, for investment management, and for enterprise-wide risk management. He also points out key pitfalls to watch out for in risk-management systems. The value-at-risk approach continues to improve worldwide standards for managing numerous types of risk. Now more than ever, professionals can depend on Value at Risk for comprehensive, authoritative counsel on VAR, its application, and its results-and to keep ahead of the curve.

Sample Size, Skewness and Leverage Effects in Value at Risk and Expected Shortfall Estimation

Sample Size, Skewness and Leverage Effects in Value at Risk and Expected Shortfall Estimation
Author: Laura García Jorcano
Publisher: Ed. Universidad de Cantabria
Total Pages: 162
Release: 2020-02-24
Genre: Business & Economics
ISBN: 8481029122
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The thesis analyzes the effect that the sample size, the asymmetry in the distribution of returns and the leverage in their volatility have on the estimation and forecasting of market risk in financial assets. The goal is to compare the performance of a variety of models for the estimation and forecasting of Value at Risk (VaR) and Expected Shortfall (ES) for a set of assets of different nature: market indexes, individual stocks, bonds, exchange rates, and commodities. The three chapters of the thesis address issues of greatest interest for the measurement of risk in financial institutions and, therefore, for the supervision of risks in the financial system. They deal with technical issues related to the implementation of the Basel Committee's guidelines on some aspects of which very little is known in the academic world and in the specialized financial sector. In the first chapter, a numerical correction is proposed on the values usually estimatedwhen there is little statistical information, either because it is a financial asset (bond, investment fund...) recently created or issued, or because the nature or the structure of the asset or portfolio have recently changed. The second chapter analyzes the relevance of different aspects of risk modeling. The third and last chapter provides a characterization of the preferable methodology to comply with Basel requirements related to the backtesting of the Expected Shortfall.