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Value at Risk and Expected Shortfall under General Semi-parametric GARCH models

Xuehai Zhang ()
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Xuehai Zhang: Paderborn University

No 126, Working Papers CIE from Paderborn University, CIE Center for International Economics

Abstract: Risk management has been emphasized by financial institutions and the Basel Com- mittee on Banking Supervision (BCBS). The core issue in risk management is the mea- surement of the risks. Value at Risk (VaR) and Expected Shortfall (ES) are the widely used tools in quantitative risk management. Due to the ineptitude of VaR on tail risk performances, ES is recommended as the financial risk management metrics by BCBS. In this paper, we generate general SemiGARCH class models with a time-varying scale function. GARCH class models, based on the conditional t-distribution, are parametric extensions. Besides, backtesting with the semiparametric approach is also discussed. Fol- lowing Basel III, the trac light tests are applied in the model validation. Finally, we propose the loss functions with the views from regulators and firms, combing a power transformation in the model selection and it is shown that semiparametric models are a necessary option in practical financial risk management.

Pages: 43 pages
Date: 2019-08
New Economics Papers: this item is included in nep-ban, nep-ore and nep-rmg
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