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1 Operations Research and Decisions

1 2010

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Estimation of Value at Risk: Extreme value and robust approaches

Trzpiot G., Majewska J.

Operations Research and Decisions

2010

Vol. 20, No. 1

131-143

The large portfolios of traded assets held by many financial institutions have made the measurement of market risk a necessity. In practice, VaR measures are computed for several holding periods and confidence levels. A key issue in implementing VaR and related risk measures is to obtain accurate estimates for the tails of the conditional profit and loss distribution at the relevant horizons. VaR forecasts can be heavily affected by a few influential points, especially when long forecast horizons are considered. Robustness can be enhanced by fitting a generalized Pareto distribution to the tails of the distribution of the residual and sampling tail residuals from this density. However, to ensure a sufficiently large breakdown point for the estimator of the generalized Pareto tails, robust estimation is needed (see Dell’Aquila, Ronnchetti, 2006). The aim of the paper is to compare selected approaches to computing Value at Risk. We consider classical and robust conditional (GARCH) and unconditional (EVT) semi-nonparametric models where tail events are modeled using the generalized Pareto distribution. We wish to answer the question of whether the robust semi-nonparametric procedure generates more accurate VaRs than the classical approach does.