How Accurate are Modern Value-at-Risk Estimators Derived from Extreme Value Theory?

Benjamin R. Auer and Benjamin Mögel

No 6288, CESifo Working Paper Series from CESifo

Abstract: In this study, we compare the out-of-sample forecasting performance of several modern Value-at- Risk (VaR) estimators derived from extreme value theory (EVT). Specifically, in a multi-asset study covering 30 years of stock, bond, commodity and currency market data, we analyse the accuracy of the classic generalised Pareto peak over threshold approach and three recently proposed methods based on the Box-Cox transformation, L-moment estimation and the Johnson system of distributions. We find that, in their unconditional form, some of the estimators are acceptable under current regulatory assessment rules but none of them can continuously pass more advanced tests of forecasting accuracy. In their conditional forms, forecasting power is significantly increased and the Box-Cox method proves to be the most promising estimator. However, it is also important to stress that the traditional historical simulation approach, which is currently the most frequently used VaR estimator in commercial banks, can not only keep up with the EVT-based methods but occasionally even outperforms them (depending on the setting: unconditional vs. conditional). Thus, recent claims to generally replace this simple method by theoretically more advanced EVT-based methods may be premature.

Keywords: value-at-risk; extreme value theory; historical simulation; backtest; financial crisis (search for similar items in EconPapers)
JEL-codes: G10 G11 G17 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-for and nep-rmg
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