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Forecasting Value-At-Risk With Two-Step Method: Garch-Exponentiated Odd Log-Logistic Normal Model

Author

Listed:
  • Emrah ALTUN

    (Department of Statistics, Hacettepe University, Turkey. Corresponding Author.)

  • Morad ALIZADEH

    (Department of Statistics, Persian Gulf University, Bushehr, Iran.)

  • Gamze OZEL

    (Department of Statistics, Hacettepe University, Turkey.)

  • Hüseyin TATLIDIL

    (Department of Statistics, Hacettepe University, Turkey.)

  • Najmieh MAKSAYI

    (Faculty of Mathematics, University of Sistan and Balouchestan, Iran.)

Abstract

The purpose of this study is to evaluate the forecasting ability of GARCH-type models in estimating the Value-at-Risk (VaR) by introducing a new four-parameter distribution, called Exponentiated Odd Log-Logistic Normal distribution. The statistical properties of new heavytailed distribution are investigated and a simulation study is performed to assess the maximum likelihood estimations of introduced distribution. Then, the VaR is forecasted by using mean and volatility forecasts and quantile estimation of introduced distribution. Daily VaR forecasting ability of proposed two-stage model is compared with the GARCH models specified under heavy-tailed distributions by means of two backtesting methods. Empirical findings show that proposed two-stage model outperforms to well-known distributions such as normal, Student’s-t, generalized error, and skewed generalized error distributions at high quantiles.

Suggested Citation

  • Emrah ALTUN & Morad ALIZADEH & Gamze OZEL & Hüseyin TATLIDIL & Najmieh MAKSAYI, 2017. "Forecasting Value-At-Risk With Two-Step Method: Garch-Exponentiated Odd Log-Logistic Normal Model," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 97-115, December.
    • Handle: RePEc:rjr:romjef:v::y:2017:i:4:p:97-115
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    References listed on IDEAS

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    More about this item

    Keywords

    Value-at-Risk; GARCH model; log–logistic distribution; maximum likelihood; estimation; normal distribution;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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