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Interest rate risk management - calculating Value at Risk using EWMA and GARCH models

Author

Listed:
  • Ioan TRENCA
  • Simona MUTU

    (Babes-Bolyai University Cluj-Napoca)

Abstract

Value at risk assesses financial risk by evaluating the probability of loss that results from stochastic variation of the rate of return. The methodology is based on historical data reflecting this variation, usually as an estimated probability of default function. The fact that return distributions are not constant over time poses exceptional challenges in the estimation. In order to remedy this problem we can estimate the volatility of the financial variables using EWMA and GARCH models, that are robust to fat-tailedness in the conditional distribution of returns. The assessment of the models’ performance is based on a range of measures that address the conservativeness, accuracy and efficiency of each one.

Suggested Citation

  • Ioan TRENCA & Simona MUTU, 2009. "Interest rate risk management - calculating Value at Risk using EWMA and GARCH models," Finante - provocarile viitorului (Finance - Challenges of the Future), University of Craiova, Faculty of Economics and Business Administration, vol. 1(10), pages 48-56, December.
    • Handle: RePEc:aio:fpvfcf:v:1:y:2009:i:10:p:48-56
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    Cited by:

    1. Ilhami KARAHANOGLU, 2020. "The VaR comparison of the fresh investment toolBITCOIN with other conventional investment tools, gold, stock exchange (BIST100) and foreign currencies (EUR/USD VS TRL)," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 11, pages 160-181, December.

    More about this item

    Keywords

    value at risk; time varying volatility; EWMA model; GARCH model; interest rate risk;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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