Backtesting VaR under the COVID-19 sudden changes in volatility

Brenda Castillo, Ángel León and Trino Ñíguez Grau

Finance Research Letters, 2021, vol. 43, issue C

Abstract: We analyze the impact of the COVID-19 pandemic on the conditional variance of stock returns. We look at this effect from a global perspective, so we employ series of major stock market and sector indices. We use the Hansen’s Skewed-t distribution with EGARCH extended to control for sudden changes in volatility. We oversee the COVID-19 effect on measures of downside risk such as the Value-at-Risk. Our results show that there is a significant sudden shift up in the return distribution variance post the announcement of the pandemic, which must be explained properly to obtain reliable measures for financial risk management.

Keywords: Backtesting; EGARCH; Monte Carlo; Skewed-t; Value-at-Risk (search for similar items in EconPapers)
JEL-codes: C22 C58 G17 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:43:y:2021:i:c:s1544612321001057

DOI: 10.1016/j.frl.2021.102024

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