Forecasting Extreme Financial Risk: A Critical Analysis of Practical Methods for the Japanese Market

Jon Danielsson and Yuji Morimoto
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Yuji Morimoto: Morgan Stanley Dean Witter

Monetary and Economic Studies, 2000, vol. 18, issue 2, 25-48

Abstract: The various tools for risk measurement and management, especially for value-at-risk (VaR), are compared, with special emphasis on Japanese market data. Traditional Generalized Autoregressive Conditional Heteroskedasticity (GARCH-type methods are compared to extreme value theory (EVT). The distribution of extremes, asymmetry, clustering, and the dynamic structure of VaR all count as criteria for comparison of the various methods. We find that the GARCH class of models is not suitable for VaR forecasting for the sample data, due to both the inaccuracy and the high volatility of the VaR forecasts. In contrast, EVT forecasting of VaR resulted in much better VaR estimates, and more importantly, the EVT forecasts were considerably more stable, enhancing their practical applicability for Japanese market risk forecasts.

JEL-codes: C53 D81 G20 (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (24)

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