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Nonparametric forward-looking value-at-risk

Nossman, Marcus and Vilhelmsson, Anders LU (2014) In Journal of Risk 16(4). p.103-123
Abstract
This paper proposes a new model for computing value-at-risk forecasts. The model is fully nonparametric and easy to implement. Further, it incorporates information about the market's perceived uncertainty about the future. The forward-looking information is obtained from the option market via the Chicago Board Options Exchange's implied volatility index (VIX). Using S&P 500 data from 1990 to 2010 we find that the use of option implied volatility compares favorably with generalized autoregressive conditional heteroscedasticity (GARCH)-type models in terms of forecast performance. By comparing the model primarily used in the banking sector to our new model, we find that a financial institution using our model has on average a lower... (More)
This paper proposes a new model for computing value-at-risk forecasts. The model is fully nonparametric and easy to implement. Further, it incorporates information about the market's perceived uncertainty about the future. The forward-looking information is obtained from the option market via the Chicago Board Options Exchange's implied volatility index (VIX). Using S&P 500 data from 1990 to 2010 we find that the use of option implied volatility compares favorably with generalized autoregressive conditional heteroscedasticity (GARCH)-type models in terms of forecast performance. By comparing the model primarily used in the banking sector to our new model, we find that a financial institution using our model has on average a lower market induced capital requirement (MCR). However, during the time period leading up to the financial crisis our model gives a 40% higher MCR. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Journal of Risk
volume
16
issue
4
pages
103 - 123
publisher
Risk Publications
external identifiers
  • wos:000348566700005
  • scopus:84973544755
ISSN
1465-1211
language
English
LU publication?
yes
id
eeffc1da-36f8-4f4b-982e-e2b4e81c4546 (old id 5069102)
alternative location
http://www.kyos.com/news-highlights/non-parametric-forward-looking-value-at-risk/
date added to LUP
2015-02-25 13:42:13
date last changed
2017-01-01 03:07:01
@article{eeffc1da-36f8-4f4b-982e-e2b4e81c4546,
  abstract     = {This paper proposes a new model for computing value-at-risk forecasts. The model is fully nonparametric and easy to implement. Further, it incorporates information about the market's perceived uncertainty about the future. The forward-looking information is obtained from the option market via the Chicago Board Options Exchange's implied volatility index (VIX). Using S&P 500 data from 1990 to 2010 we find that the use of option implied volatility compares favorably with generalized autoregressive conditional heteroscedasticity (GARCH)-type models in terms of forecast performance. By comparing the model primarily used in the banking sector to our new model, we find that a financial institution using our model has on average a lower market induced capital requirement (MCR). However, during the time period leading up to the financial crisis our model gives a 40% higher MCR.},
  author       = {Nossman, Marcus and Vilhelmsson, Anders},
  issn         = {1465-1211},
  language     = {eng},
  number       = {4},
  pages        = {103--123},
  publisher    = {Risk Publications},
  series       = {Journal of Risk},
  title        = {Nonparametric forward-looking value-at-risk},
  volume       = {16},
  year         = {2014},
}