Forecasting Value-at-Risk with a duration-based POT method

P. Araújo Santos and M.I. Fraga Alves

Mathematics and Computers in Simulation (MATCOM), 2013, vol. 94, issue C, 295-309

Abstract: Threshold methods, based on fitting a stochastic model to the excesses over a threshold, were developed under the acronym POT (peaks over threshold). To eliminate the tendency to clustering of violations, we propose a model-based approach within the POT framework that uses the durations between excesses as covariates. Based on this approach we suggest models for forecasting one-day-ahead Value-at-Risk. A simulation study was performed to validate the estimation procedure. Comparative studies with global stock market indices provide evidence that the proposed models can perform better than state-of-the art risk models and better than the widely used RiskMetrics model in terms of unconditional coverage, clustering of violations and capital requirements under the Basel II Accord.

Keywords: Quantitative risk management; Statistics of extremes; Financial timeseries (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:94:y:2013:i:c:p:295-309

DOI: 10.1016/j.matcom.2012.07.016

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