Faculty of Economics and Business Administration Publications Database

Value-at-Risk: a multivariate switching regime approach

Authors:
Billio, Monica
Source:
Volume: 7
Number: 5
Pages: 531 - 554
Month: December
ISSN-Print: 0927-5398
Link External Source: Online Version
Year: 2000
Keywords: Value-at-Risk; Switching regime models; Multivariate approach; Factors models
Abstract:

This paper analyses the application of a switching volatility model to forecast the distribution of returns and to estimate the Value-at-Risk (VaR) of both single assets and portfolios. We calculate the VaR value for 10 Italian stocks and a number of portfolios based on these stocks. The calculated VaR values are also compared with the variance–covariance approach used by JP Morgan in RiskMetrics™ and GARCH(1,1) models. Under backtesting, the VaR values calculated using the switching regime beta model are preferred to both other methods. The Proportion of Failure and Time Until First Failure tests [The Journal of Derivatives (1995) 73–84] confirm this result.

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