Predicting Risk with Risk Measures: An Empirical Study
Copyright policy )Predicting Risk with Risk Measures: An Empirical Study
In this study we consider the risk estimation as a stochastic process based on the Sample Quantile Process (SQP) - which is a generalization of the Value-at-Risk calculated on a rolling sample. Using SQP's, we are able to show and quantify the pro-cyclicality of the current way financial institutions measure their risk. Analysing 11 stock indices, we show that, if the past volatility is low, the historical computation of the risk measure underestimates the future risk, while in periods of high volatility, the risk measure overestimates the risk. Moreover, using a simple GARCH (1,1) model, we conclude that this pro-cyclical effect is related to the clustering of volatility. We argue that this has important consequences for the regulation in times of crisis.
- Université Paris Cité France
- University of Paris France
- Sorbonne Université France
- Sorbonne université France
- École Supérieure des Sciences Économiques et Commerciales France
C.C1.C13 - Estimation: General, C.C5.C53 - Forecasting and Prediction Methods • Simulation Methods, volatility, G.G3.G32 - Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill, C.C5.C52 - Model Evaluation, Validation, and Selection, risk measure, C.C2.C22 - Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes, sample quantile process, G.G0.G01 - Financial Crises, [QFIN.RM] Quantitative Finance [q-fin]/Risk Management [q-fin.RM], VaR, stochastic model
C.C1.C13 - Estimation: General, C.C5.C53 - Forecasting and Prediction Methods • Simulation Methods, volatility, G.G3.G32 - Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill, C.C5.C52 - Model Evaluation, Validation, and Selection, risk measure, C.C2.C22 - Time-Series Models • Dynamic Quantile Regressions • Dynamic Treatment Effect Models • Diffusion Processes, sample quantile process, G.G0.G01 - Financial Crises, [QFIN.RM] Quantitative Finance [q-fin]/Risk Management [q-fin.RM], VaR, stochastic model
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