Value at Risk: A Comparative Analysis. Filip Iorgulescu. Introduction. Why is VaR a challenging subject for me?. - scientific but also practical - easy to understood, difficult to determine - a benchmark with certain shortcomings.
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Value at Risk:A Comparative Analysis
Why is VaR a challenging subject for me?
- scientific but also practical
- easy to understood, difficult to determine
- a benchmark with certain shortcomings
VaR - the number that measures risk, so popular it may not need an introduction
The objective: to develop a comparison between different approaches to VaR by the means of a portfolio consisting of three stocks traded at BSE
- the volatility models
- the distributional approaches
It was considered that T = 1 day and p = 1%
Mainly based on Christoffersen (2002) and Codirlasu (2007)
Therefore, I set out from 1-day, 1% VaR formula
VaR1% = - (Q1%σ + μ)S
The following approaches were considered:
Welcome to the Championship of VaR measures!!!
The pitch is ready… all the tickets are sold…
The computed VaR measures were examined according to the following criteria:
- level of capital coverage
- calculation requirements
Meet the players – The Data
Period: 5 Jan 2001 – 9 May 2008
- Volatility clustering => conditional volatility models are recommended
- Non-normality => other distributional approaches are needed
- No unit roots
A portfolio consisting of three stocks with equal weights: ATB, AZO and TLV. Arguments:
quoted at Category 1 at BSE
diversification across industries
Group 1 – Historical volatility
1-day, 1% VaR graphs
Historical volatility approach
VaR GHD seems to be the most appropriate choice under historical volatility approach.
Group 2 – EWMA volatility
ES EVT seems to be the most appropriate choice under EWMA volatility approach.
Group 3 – GARCH for the portfolio
VaR GHD seems to be the most appropriate choice under GARCH (portfolio) volatility approach.
Group 4 – GARCH for the stocks
VaR NIG seems to be the most appropriate choice under GARCH (stocks) volatility approach.
Group 5 – GARCH DCC
VaR GHD seems to be the most appropriate choice under GARCH DCC volatility approach.
Conclusions – The Semifinals
Conclusions – The Final
Thank you for attending this presentation!