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Evaluating the performance of the skewed distributions to forecast Value at Risk in the Global Financial Crisis

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Abad Romero, Pilar and Benito Muela, Sonia and Sánchez Granero, Miguel Angel and López, Carmen (2013) Evaluating the performance of the skewed distributions to forecast Value at Risk in the Global Financial Crisis. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 40, 2013, ] (Unpublished)

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Official URL: http://eprints.ucm.es/23999/


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Abstract

This paper evaluates the performance of several skewed and symmetric distributions in modeling the tail behavior of daily returns and forecasting Value at Risk (VaR). First, we used some goodness of fit tests to analyze which distribution best fits the data. The comparisons in terms of VaR have been carried out examining the accuracy of the VaR estimate and minimizing the loss function from the point of view of the regulator and the firm. The results show that the skewed distributions outperform the normal and Student-t (ST) distribution in fitting portfolio returns. Following a two-stage selection process, whereby we initially ensure that the distributions provide accurate VaR estimates and then, focusing on the firm´s loss function, we can conclude
that skewed distributions outperform the normal and ST distribution in forecasting VaR. From the point of view of the regulator, the superiority of the skewed distributions related to ST is not so evident. As the firms are free to choose the VaR model they use to forecast VaR, in practice,
skewed distributions will be more frequently used.


Item Type:Working Paper or Technical Report
Additional Information:

This work has been funded by the Spanish Ministerio de Ciencia y Tecnología (ECO2009-10398/ECON and ECO2011-23959).

Uncontrolled Keywords:Value at Risk, Parametric model, Skewness t-Generalised Distribution, GARCH Model, Risk Management, Loss function.
Subjects:Social sciences > Economics > Econometrics
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2013
Number:40
ID Code:23999
Deposited On:19 Dec 2013 10:06
Last Modified:16 Feb 2016 09:28

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