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Volatility-sensitive Bayesian estimation of portfolio value-at-risk and conditional value-at-risk
Stockholm University, Faculty of Science, Department of Mathematics.ORCID iD: 0000-0001-7855-8221
Stockholm University, Faculty of Science, Department of Mathematics.ORCID iD: 0000-0001-9228-0369
Stockholm University, Faculty of Science, Department of Mathematics.ORCID iD: 0000-0001-5992-1216
Number of Authors: 32024 (English)In: Journal of Risk, ISSN 1465-1211, E-ISSN 1755-2842, Vol. 26, no 4, p. 1-29Article in journal (Refereed) Published
Abstract [en]

We suggest a new method for integrating volatility information for estimating the value-at-risk and conditional value-at-risk of a portfolio. This new method is developed from the perspective of Bayesian statistics and is based on the idea of volatility clustering. By specifying the hyperparameters in a conjugate prior based on two different rolling window sizes, it is possible to quickly adapt to changes in volatility and automatically specify the degree of certainty in the prior. This gives our method an advantage over existing Bayesian methods, which are less sensitive to such changes in volatilities and usually lack standardized ways of expressing the degree of belief. We illustrate our new approach using both simulated and empirical data. The new method provides a good alternative to other well-known homoscedastic and heteroscedastic models for risk estimation, especially during turbulent periods, when it can quickly adapt to changing market conditions.

Place, publisher, year, edition, pages
2024. Vol. 26, no 4, p. 1-29
Keywords [en]
Bayesian inference, conditional value-at-risk (CVaR), conjugate prior, posterior predictive distribution, value-at-risk (VaR)
National Category
Probability Theory and Statistics
Identifiers
URN: urn:nbn:se:su:diva-238679DOI: 10.21314/JOR.2023.018ISI: 001315143800001Scopus ID: 2-s2.0-85200236712OAI: oai:DiVA.org:su-238679DiVA, id: diva2:1932633
Available from: 2025-01-29 Created: 2025-01-29 Last updated: 2025-01-29Bibliographically approved

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Bodnar, TarasNiklasson, VilhelmThorsén, Erik

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