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Cyclicality and term structure of Value-at-Risk within a threshold autoregression setup

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  • Bec, Frédérique
  • Gollier, Christian

Abstract

This paper explores empirically the link between stocks returns Value-at-Risk (VaR) and the state of financial markets across various holding horizons. The econometric analysis is based on a self-exciting threshold autoregression setup. Using quarterly French and US data from 1970Q4 to 2012Q4, it turns out that the k-year VaR of equities is actually dependent on the state of the market: the expected losses as measured by the VaR are smaller in bear market than in normal or bull market, whatever the horizon. These results suggest that the rules regarding the solvency capital requirements should adapt to the state of the financial market.

Suggested Citation

  • Bec, Frédérique & Gollier, Christian, 2014. "Cyclicality and term structure of Value-at-Risk within a threshold autoregression setup," IDEI Working Papers 835, Institut d'Économie Industrielle (IDEI), Toulouse.
    • Handle: RePEc:ide:wpaper:28448
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    References listed on IDEAS

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    Cited by:

    1. Frédérique Bec & Annabelle de Gaye, 2019. "Le modèle autorégressif autorégressif à seuil avec effet rebond : Une application aux rendements boursiers français et américains ," Working Papers hal-02014663, HAL.

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    More about this item

    Keywords

    Expected equities returns; Value at Risk; Financial cycle; Investment horizon; Threshold Autoregression;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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