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Value-at-risk — the comparison of state-of-the-art models on various assets

Author

Listed:
  • Karol Kielak

    (Quantitative Finance Research Group; Faculty of Economic Sciences, University of Warsaw)

  • Robert Ślepaczuk

    (Quantitative Finance Research Group; Faculty of Economic Sciences, University of Warsaw)

Abstract

This paper compares different approaches to Value-at-Risk measurement based on parametric and non-parametric approaches. Three portfolios are taken into consideration — the first one containing only stocks from the London Stock Exchange, the second one based on different assets of various origins and the third one consisting of cryptocurrencies. Data used cover the period of more than 20y. In the empirical part of the study, parametric methods based on mean-variance framework are compared with GARCH(1,1) and EGARCH(1,1) models. Different assumptions concerning returns’ distribution are taken into consideration. Adjustment for the fat tails effect is made by using Student t distribution in the analysis. One-day-ahead 95%VaR estimation is then calculated. Thereafter, models are validated using Kupiec and Christoffersen tests and Monte Carlo Simulation for reliable verification of the hypotheses. The overall goal of this paper is to establish if analyzed models accurately estimate Value-at-Risk measure, especially if we take into account assets with various returns distribution characteristics.

Suggested Citation

  • Karol Kielak & Robert Ślepaczuk, 2020. "Value-at-risk — the comparison of state-of-the-art models on various assets," Working Papers 2020-28, Faculty of Economic Sciences, University of Warsaw.
    • Handle: RePEc:war:wpaper:2020-28
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    File URL: https://www.wne.uw.edu.pl/index.php/download_file/5800/
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    References listed on IDEAS

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    More about this item

    Keywords

    risk management; Value-at-Risk; GARCH models; returns distribution; Monte Carlo Simulation; asset class; cryptocurrencies;
    All these keywords.

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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