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Backtesting VaR in consideration of the higher moments of the distribution for minimum-variance hedging portfolios

Author

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  • Chuang, Chung-Chu
  • Wang, Yi-Hsien
  • Yeh, Tsai-Jung
  • Chuang, Shuo-Li

Abstract

The higher moments of a distribution often lead to estimated value-at-risk (VaR) biases. This study's objective is to examine the backtesting of VaR models that consider the higher moments of the distribution for minimum-variance hedging portfolios (MVHPs) of the stock indices and futures in the Greater China Region for both short and long hedgers. The results reveal that the best backtesting VaR for the MVHP considered both the higher moments of the MVHP distribution and the asymmetry in volatility, cross-market asymmetry in volatility, and level effects in the covariance matrix of assets in the MVHP. These empirical results provide references for investors in risk management.

Suggested Citation

  • Chuang, Chung-Chu & Wang, Yi-Hsien & Yeh, Tsai-Jung & Chuang, Shuo-Li, 2014. "Backtesting VaR in consideration of the higher moments of the distribution for minimum-variance hedging portfolios," Economic Modelling, Elsevier, vol. 42(C), pages 15-19.
    • Handle: RePEc:eee:ecmode:v:42:y:2014:i:c:p:15-19
    DOI: 10.1016/j.econmod.2014.05.037
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    Cited by:

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    2. Narayan, Paresh Kumar & Sharma, Susan Sunila, 2016. "Intraday return predictability, portfolio maximisation, and hedging," Emerging Markets Review, Elsevier, vol. 28(C), pages 105-116.
    3. Xu, Qifa & Zhou, Yingying & Jiang, Cuixia & Yu, Keming & Niu, Xufeng, 2016. "A large CVaR-based portfolio selection model with weight constraints," Economic Modelling, Elsevier, vol. 59(C), pages 436-447.

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    More about this item

    Keywords

    Value-at-risk; Minimum-variance hedging portfolios; Backtest; Level effect; Futures;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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