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Evaluating value at risk using selection criteria of the model and the information set

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  • Pilar Gargallo
  • Jesus Miguel
  • Pilar Olave
  • Manuel Salvador

Abstract

This article proposes a new methodology to estimate the Value at Risk (VaR) in a time varying heteroscedastic dynamic regression context. The methodology assumes that the form of the model and its information set may also change over time and takes into account the uncertainty associated with the joint selection of model and information set, providing more reliability to the elaborated forecasts. A Bayesian framework is adopted and a cross validation selection criterion, asymptotically equivalent to the Bayes factor, is proposed. Finally, we estimate the VaR on line of five international equity indexes. Our VaR estimations tend to follow the evolution of the series more closely than classical procedures by keeping the coverage properties.

Suggested Citation

  • Pilar Gargallo & Jesus Miguel & Pilar Olave & Manuel Salvador, 2010. "Evaluating value at risk using selection criteria of the model and the information set," Applied Financial Economics, Taylor & Francis Journals, vol. 20(18), pages 1415-1428.
    • Handle: RePEc:taf:apfiec:v:20:y:2010:i:18:p:1415-1428
    DOI: 10.1080/09603107.2010.498346
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    References listed on IDEAS

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    1. Angelidis, Timotheos & Benos, Alexandros & Degiannakis, Stavros, 2004. "The Use of GARCH Models in VaR Estimation," MPRA Paper 96332, University Library of Munich, Germany.
    2. Pesaran, M. Hashem & Timmermann, Allan, 2004. "How costly is it to ignore breaks when forecasting the direction of a time series?," International Journal of Forecasting, Elsevier, vol. 20(3), pages 411-425.
    3. M. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2006. "Forecasting Time Series Subject to Multiple Structural Breaks," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(4), pages 1057-1084.
    4. Pesaran, M. Hashem & Timmermann, Allan, 2007. "Selection of estimation window in the presence of breaks," Journal of Econometrics, Elsevier, vol. 137(1), pages 134-161, March.
    5. Christoffersen, Peter F, 1998. "Evaluating Interval Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 841-862, November.
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    Cited by:

    1. Ram�n Barber�n & Pilar Egea & Manuel Salvador & Pilar Gracia de Renter�a, 2012. "An�lisis Coste-Beneficio de la introducci�n de dispositivos ahorradores de agua. Estudio de un caso en el sector hotelero," Documentos de Trabajo dt2012-04, Facultad de Ciencias Económicas y Empresariales, Universidad de Zaragoza.

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