Estimating value-at-risk under a Heath--Jarrow--Morton framework with jump

Samuel Yau Man Ze-To

Applied Economics, 2012, vol. 44, issue 21, 2729-2741

Abstract: This article proposes a new methodology for measuring Value-at-Risk (hereafter VaR) using a model that incorporates both volatility and jumps. Heath--Jarrow--Morton (HJM) model has been used for the valuation of interest rate derivatives. This study extends the use of HJM model to the estimation VaR. This article specifically uses a two-factor HJM jump-diffusion model for the computation. The study models the Eurodollar futures prices using its derivatives. In addition, this article uses a new volatility specification of Ze-To (2002) to construct the HJM dynamics. The result indicates that the VaR model using HJM jump-diffusion framework performs well in capturing the nonnormality and in providing accurate VaR forecasts in the in-sample and out-sample tests.

Date: 2012
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DOI: 10.1080/00036846.2011.566198

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