Parametric VaR According to Student’s t-Distribution

James Ming Chen
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James Ming Chen: Michigan State University

Chapter Chapter 14 in Postmodern Portfolio Theory, 2016, pp 261-279 from Palgrave Macmillan

Abstract: Abstract Parametric VaR “generalizes to other distributions as long as all the uncertainty is contained in σ.”1 If we are concerned that reliance on the Gaussian distribution systematically and inappropriately underestimates tail risk, we could substitute any “distribution [with] fatter tails than the normal.”2 Phillipe Jorion recommends the use of Student’s t-distribution with six degrees of freedom.3 I shall do my best to provide a theoretical justification for conducting parametric VaR according to the family of Student’s t-distributions. Even more importantly, I shall suggest an empirical basis for a more precise estimate of the number of degrees of freedom needed to calibrate Student’s t-distribution in response to observed levels of kurtosis.4

Keywords: Stock Return; Supra Note; Portfolio Selection; Stable Distribution; Real Estate Investment Trust (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:pal:qpochp:978-1-137-54464-3_14

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DOI: 10.1057/978-1-137-54464-3_14

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