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Learning by Failing: A Simple VaR Buffer

Author

Listed:
  • Christophe Boucher

    (A.A.Advisors-QCG - ABN AMRO, CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine)

  • Bertrand Maillet

    (LEO - Laboratoire d'Économie d'Orleans [UMR7322] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique, CEMOI - Centre d'Économie et de Management de l'Océan Indien - UR - Université de La Réunion, A.A.Advisors-QCG - ABN AMRO)

Abstract

We study in this article the problem of model risk in VaR computations and document a procedure for correcting the bias due to specification and estimation errors. This practical method consists of "learning from model mistakes", since it dynamically relies on an adjustment of the VaR estimates – based on a back-testing framework – such as the frequency of past VaR exceptions always matches the expected probability. We finally show that integrating the model risk into the VaR computations implies a substantial minimum correction to the order of 10–40% of VaR levels.

Suggested Citation

  • Christophe Boucher & Bertrand Maillet, 2013. "Learning by Failing: A Simple VaR Buffer," Post-Print hal-01243425, HAL.
    • Handle: RePEc:hal:journl:hal-01243425
    DOI: 10.1111/fmii.12006
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    Citations

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    Cited by:

    1. Christophe Boucher & Gregory Jannin & Patrick Kouontchou & Bertrand Maillet, 2013. "An Economic Evaluation of Model Risk in Long-term Asset Allocations," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 475-491, August.
    2. Jean-Paul Laurent & Hassan Omidi Firouzi, 2022. "Market Risk and Volatility Weighted Historical Simulation After Basel III," Working Papers hal-03679434, HAL.
    3. Claußen, Arndt & Rösch, Daniel & Schmelzle, Martin, 2019. "Hedging parameter risk," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 111-121.

    More about this item

    Keywords

    C14; C50; G11; G32; Revue AERES;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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