Interest rate risk management - calculating Value at Risk using EWMA and GARCH models

Ioan Trenca and Simona Mutu
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Simona Mutu: Babes-Bolyai University Cluj-Napoca

Finante - provocarile viitorului (Finance - Challenges of the Future), 2009, vol. 1, issue 10, 48-56

Abstract: Value at risk assesses financial risk by evaluating the probability of loss that results from stochastic variation of the rate of return. The methodology is based on historical data reflecting this variation, usually as an estimated probability of default function. The fact that return distributions are not constant over time poses exceptional challenges in the estimation. In order to remedy this problem we can estimate the volatility of the financial variables using EWMA and GARCH models, that are robust to fat-tailedness in the conditional distribution of returns. The assessment of the models’ performance is based on a range of measures that address the conservativeness, accuracy and efficiency of each one.

Keywords: value at risk; time varying volatility; EWMA model; GARCH model; interest rate risk (search for similar items in EconPapers)
JEL-codes: C21 C51 G21 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:aio:fpvfcf:v:1:y:2009:i:10:p:48-56

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