Risk Measurement Performance of Alternative Distribution Functions
By Turan G. Bali, Panayiotis Theodossiou. 2008
71 citations recorded by the source corpus.
This paper evaluates the performance of three extreme value distributions, i.e., generalized Pareto distribution (GPD), generalized extreme value distribution (GEV), and Box-Cox-GEV, and four skewed fat-tailed distributions, i.e., skewed generalized error distribution (SGED), skewed generalized t (SGT), exponential generalized beta of the second kind (EGB2), and inverse hyperbolic sign (IHS) in estimating conditional and unconditional value at risk (VaR) thresholds. The results provide strong evidence that the SGT, EGB2, and IHS distributions perform as well as the more specialized extreme value distributions in modeling the tail behavior of portfolio returns. All three distributions produce similar VaR thresholds and perform better than the SGED and the normal distribution in approximating the extreme tails of the return distribution. The conditional coverage and the out-of-sample performance tests show that the actual VaR thresholds are time varying to a degree not captured by unconditional VaR measures. In light of the fact that VaR type measures are employed in many different types of financial and insurance applications including the determination of capital requirements, capital reserves, the setting of insurance deductibles, the setting of reinsurance cedance levels, as well as the estimation of expected claims and expected losses, these results are important to financial managers, actuaries, and insurance practitioners.
Subfields: Economics and Econometrics, Finance, Statistics and Probability
View Paper: https://www.semanticscholar.org/paper/ce87b6e8686ed8e138aed8070f6ed1bfbabaf59a
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Citations in the corpus
- A comprehensive review of Value at Risk methodologies (2014, methodology): “Recent empirical evidence shows that this approach works quite well in estimating VaR (see Barone-Adesi and Giannopoulos, 2001; Barone-Adesi et al., 2002; Zenti and Pallotta, 2001; Pritsker, 2001; Giannopoulos and Tunaru, 2005). As for other methods, Zikovic and Aktan (2009), Angelidis et al.”
- Cyclicality in Catastrophic and Operational Risk Measurements (2007, unknown): “Following Black’s (1976) exploration of this phenomenon, it is now commonly referred to as the leverage effect: changes in stock prices tend to be negatively related to changes in volatility.”