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Evaluation of volatility models for forecasting Value-at-Risk and Expected Shortfall in the Portuguese stock market

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  • Sobreira, Nuno
  • Louro, Rui

Abstract

We run a forecasting competition of different methodologies to estimate Value-at-Risk (VaR) and Expected Shortfall (ES) with data on several stocks traded in the Euronext Lisbon stock exchange. The results are gauged using several backtesting procedures and compared with several loss functions. The asymmetric GARCH class with Extreme Value Theory generally performed better both for VaR and ES forecasting, especially, for more conservative coverage levels. Skewed distributions do not perform better than their conventional counterparts. The recommended sample size depends if the focus is on VaR or magnitude of the losses, although we find some superiority of larger sample sizes.

Suggested Citation

  • Sobreira, Nuno & Louro, Rui, 2020. "Evaluation of volatility models for forecasting Value-at-Risk and Expected Shortfall in the Portuguese stock market," Finance Research Letters, Elsevier, vol. 32(C).
    • Handle: RePEc:eee:finlet:v:32:y:2020:i:c:s1544612318305403
    DOI: 10.1016/j.frl.2019.01.010
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    3. Hong Qiu & Genhua Hu & Yuhong Yang & Jeffrey Zhang & Ting Zhang, 2020. "Modeling the Risk of Extreme Value Dependence in Chinese Regional Carbon Emission Markets," Sustainability, MDPI, vol. 12(19), pages 1-15, September.
    4. Ameni Ben Salem & Imene Safer & Islem Khefacha, 2021. "Value at Risk Estimation For the BRICS Countries : A Comparative Study," Post-Print hal-03502428, HAL.

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    More about this item

    Keywords

    VaR; Expected Shortfall; GARCH; Extreme Value Theory; Backtesting; Euronext Lisbon;
    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
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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