Bayesian Forecasting for Financial Risk Management, Pre and Post the Global Financial Crisis

Cathy W. S. Chen (), Richard Gerlach, Wcw Lee and Edward Lin ()

No 03/2011, Working Papers from University of Sydney Business School, Discipline of Business Analytics

Abstract: Value-at-Risk (VaR) forecasting via a computational Bayesian framework is considered. A range of parametric models are compared, including standard, threshold nonlinear and Markov switching GARCH specifications, plus standard and nonlinear stochastic volatility models, most considering four error probability distributions: Gaussian, Student-t, skewed-t and generalized error distribution. Adaptive Markov chain Monte Carlo methods are employed in estimation and forecasting. A portfolio of four Asia-Pacific stock markets is considered. Two forecasting periods are evaluated in light of the recent global financial crisis. Results reveal that: (i) GARCH models out-performed stochastic volatility models in almost all cases; (ii) asymmetric volatility models were clearly favoured pre-crisis; while at the 1% level during and post-crisis, for a 1 day horizon, models with skewed-t errors ranked best, while IGARCH models were favoured at the 5% level; (iii) all models forecasted VaR less accurately and anti-conservatively post-crisis

Keywords: EGARCH model; generalized error distribution; Markov chainMonte Carlo method; Value-at-Risk; Skewed Student-t; market risk charge; global nancial crisis (search for similar items in EconPapers)
Date: 2011-03
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Citations: View citations in EconPapers (8)

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