An Evaluation Framework for Alternative VaR Models

Christian Wolff, Dennis Bams and Thorsten Lehnert

No 3403, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this Paper we investigate the ability of different models to produce useful VaR-estimates for exchange rate positions. We make a distinction between models that include sophisticated tail properties and models that do not. The former type of models often leads to too extreme VaR-estimates, whereas the latter type underestimates the risk in case of extreme events. Our analysis shows that it is important to take into account parameter uncertainty, since this leads to uncertainty in the reported VaR. We make this uncertainty in the VaR explicit by means of simulation. Our empirical results suggest that more sophisticated tail-modeling approaches come at the cost of more uncertainty about the VaR estimate itself. In the case of the GARCH(1,1)-Student-t model the average VaR may be adjusted for parameter uncertainty to arrive at levels which are adequate according to out-of-sample tests.

Keywords: Value-at-risk; Financial time series; Exchange rate positions; Garch; Estimation risk; Fat tail distributions (search for similar items in EconPapers)
JEL-codes: C22 C52 G10 (search for similar items in EconPapers)
Date: 2002-06
New Economics Papers: this item is included in nep-cfn, nep-ecm, nep-fin, nep-fmk, nep-ifn and nep-rmg
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Citations: View citations in EconPapers (7)

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Journal Article: An evaluation framework for alternative VaR-models (2005)
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