A method for predicting VaR by aggregating generalized distributions driven by the dynamic conditional score

Shijia Song and Handong Li

The Quarterly Review of Economics and Finance, 2023, vol. 88, issue C, 203-214

Abstract: Constructing a more effective value at risk (VaR) prediction model has long been a goal in financial risk management. In this paper, we propose a novel parametric approach and provide a standard paradigm to demonstrate the modeling. We establish a dynamic conditional score (DCS) model based on high-frequency data and a generalized distribution (GD), namely, the GD-DCS model, to improve the forecasts of daily VaR. The model assumes that intraday returns at different moments are independent of each other and obey the same kind of GD, whose dynamic parameters are driven by DCS. By predicting the motion law of the time-varying parameters, the conditional distribution of intraday returns is determined; then, the bootstrap method is used to simulate daily returns. An empirical analysis using data from the China’s stock market and the U.S. stock market shows that Weibull-Pareto -DCS model incorporating high-frequency data is superior to traditional benchmark models, such as RGARCH, in the prediction of VaR at higher risk levels, which proves that this approach contributes to the improvement of risk measurement tools.

Keywords: Generalized distribution; High-frequency data; Weibull-Pareto distribution; DCS; VaR (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:88:y:2023:i:c:p:203-214

DOI: 10.1016/j.qref.2023.01.006

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