Evaluating the performance of the skewed distributions to forecast Value at Risk in the Global Financial Crisis

Pilar Abad Romero, Sonia Benito Muela, Miguel Angel Sánchez Granero and Carmen López
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Pilar Abad Romero: Universidad Rey Juan Carlos, Paseo Artilleros s/n, 28032 Madrid, Spain and RFA-IREA.
Sonia Benito Muela: Universidad Nacional de Educación a Distancia (UNED) Senda del Rey 11 28223, Madrid, Spain.
Miguel Angel Sánchez Granero: Universidad de Almería, Crta. Sacramento s/n Almería, Spain.
Carmen López: Universidad Nacional de Educación a Distancia (UNED)

No 2013-40, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: This paper evaluates the performance of several skewed and symmetric distributions in modeling the tail behavior of daily returns and forecasting Value at Risk (VaR). First, we used some goodness of fit tests to analyze which distribution best fits the data. The comparisons in terms of VaR have been carried out examining the accuracy of the VaR estimate and minimizing the loss function from the point of view of the regulator and the firm. The results show that the skewed distributions outperform the normal and Student-t (ST) distribution in fitting portfolio returns. Following a two-stage selection process, whereby we initially ensure that the distributions provide accurate VaR estimates and then, focusing on the firm´s loss function, we can conclude that skewed distributions outperform the normal and ST distribution in forecasting VaR. From the point of view of the regulator, the superiority of the skewed distributions related to ST is not so evident. As the firms are free to choose the VaR model they use to forecast VaR, in practice, skewed distributions will be more frequently used.

Keywords: Value at Risk; Parametric model; Skewness t-Generalised Distribution; GARCH Model; Risk Management; Loss function. (search for similar items in EconPapers)
Pages: 21 pages
Date: 2013
Note: This work has been funded by the Spanish Ministerio de Ciencia y Tecnología (ECO2009-10398/ECON and ECO2011-23959).
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