To be the true servant of Allah, putting submission fully to HIM... The ultimate goal is to seek HIS pleasure wish HIM the blessing of Jannah in the Hereafter...In this world I will be duty-bound to carry the injunctions and all the work to the best of my ability without transgressing HIS order...

Friday, September 7, 2012

VALUE-AT-RISK MODELS: HOW CONSERVATIVE ARE THEY?

ABSTRACT


This paper compares two types of Value-at-Risk models in measuring market risk which are integrated together with either the volatility updating namely GARCH(1,1) and EGARCH(1,1). The models are estimated on Malaysian non-financial sectors data in which seven sectors are chosen to estimate the relevant parameters. To complement the estimates, several conservatism tests namely the Mean Relative Bias (MRB) and Root Mean Squared Relative Bias (RMSRB) are conducted to identify the riskiest position. The results show that although t-distribution theoretically is appropriate in handling any reasonable amount of fat tail or asymmetric biases, its appropriateness and conservative behavior in VaR application depends on the type of volatility model which has been integrated together with MCS and also the nature of the non-financial sectors involved.

Keywords:       Value-at-Risk, conservatism test.


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