Incorporating volatility updating into the historical simulation

Posted by / 31-May-2020 14:04

Incorporating volatility updating into the historical simulation

In this article we present a theoretical review of the existing literature on Value at Risk (Va R) specifically focussing on the development of new approaches for its estimation.We effect a deep analysis of the State of the Art, from standard approaches for measuring Va R to the more evolved, while highlighting their relative strengths and weaknesses.We will expose the relative strengths and weaknesses of these methodologies, from both theoretical and practical perspectives.The article's objective is to provide the financial risk researcher with all the models and proposed developments for Va R estimation, bringing him to the limits of knowledge in this field. In the next section, we review a full range of methodologies developed to estimate Va R.In Section 2.1, a non-parametric approach is presented.Parametric approaches are offered in Section 2.2, and semi-parametric approaches in Section 2.3.

Finally, the third line of research considers that higher-order conditional moments are time-varying.Basel I, also called the Basel Accord, is the agreement reached in 1988 in Basel (Switzerland) by the Basel Committee on Bank Supervision (BCBS), involving the chairmen of the central banks of Germany, Belgium, Canada, France, Italy, Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States of America.This accord provides recommendations on banking regulations with regard to credit, market and operational risks.The Parametric method under skewed and fat-tail distributions also provides promising results especially when the assumption that standardised returns are independent and identically distributed is set aside and when time variations are considered in conditional high-order moments.Lastly, it appears that some asymmetric extensions of the Ca Via R method provide results that are also promising.

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