Non-Parametric Forward looking Value-at-Risk
Publikation/Tidskrift/Serie: Journal of Risk
Förlag: Risk Publications
This paper proposes a new model for computing Value-at-Risk forecasts. The model is fully non-parametric 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 CBOEs implied volatility index VIX. Using SP500 data from 1990-2010 we find that the use of option implied volatility compares favorably to 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 crises our model gives a 40% higher MCR.
- Business Administration
- Risk management
- Implied volatility
- ISSN: 1465-1211