Estimation risk in financial risk management

Peter Christoffersen · Śılvia Gonçalves

154 citations0/0 files storedThe Journal of Risk

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Financial Risk and Volatility Modeling Stochastic processes and financial applications Risk and Portfolio Optimization

Abstract

ABSTRACT Value-at-risk (VAR) is increasingly used in portfolio risk measurement, risk capital allocation and performance attribution. Financial risk managers are therefore rightfully concerned with the precision of typical VAR techniques.;The purpose of this paper is to assess the precision of common dynamic models and to quantify the magnitude of the estimation error by constructing confidence intervals around the point VAR and expected shortfall (ES) forecasts.;A key challenge in constructing proper confidence intervals arises from the conditional variance dynamics that are typically found in speculative returns. Our paper suggests a resampling technique which takes into account parameter estimation error in dynamic models of portfolio variance.

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References

1986Generalized autoregressive conditional heteroskedasticity 1982Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation 2003Modeling and Forecasting Realized Volatility 1987A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return 2000Value At Risk: The New Benchmark for Managing Financial Risk 2006Analysis of Financial Time Series 2004CAViaR 2000Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach

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