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Nonparametric risk management with generalized hyperbolic distributions

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  • Chen, Ying
  • Härdle, Wolfgang Karl
  • Jeong, Seok-Oh

Abstract

In this paper we propose the GHADA risk management model that is based on the generalized hyperbolic (GH) distribution and on a nonparametric adaptive methodology. Compared to the normal distribution, the GH distribution possesses semi-heavy tails and represents the financial risk factors more appropriately. The nonparametric adaptive methodology has the desirable property of estimating homogeneous volatility in a short time interval. For DEM/USD exchange rate data and a German bank portfolio data the proposed GHADA model provides more accurate value at risk calculation than the traditional model based on the normal distribution. All calculations and simulations are done with XploRe.

Suggested Citation

  • Chen, Ying & Härdle, Wolfgang Karl & Jeong, Seok-Oh, 2005. "Nonparametric risk management with generalized hyperbolic distributions," SFB 649 Discussion Papers 2005-001, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2005-001
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    References listed on IDEAS

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    1. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    2. Andrew Harvey & Esther Ruiz & Neil Shephard, 1994. "Multivariate Stochastic Variance Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(2), pages 247-264.
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    Keywords

    adaptive volatility estimation; generalized hyperbolic distribution; value at risk; risk management.;
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