2015-12-03Buch DOI: 10.18452/4609
lCARE – localizing Conditional AutoRegressive Expectiles
We account for time-varying parameters in the conditional expectile based value at risk (EVaR) model. EVaR appears more sensitive to the magnitude of portfolio losses compared to the quantile-based Value at Risk (QVaR), nevertheless, by fitting the models over relatively long ad-hoc fixed time intervals, research ignores the potential time-varying parameter properties. Our work focuses on this issue by exploiting the local parametric approach in quantifying tail risk dynamics. By achieving a balance between parameter variability and modelling bias, one can safely fit a parametric expectile model over a stable interval of homogeneity. Empirical evidence at three stock markets from 2005- 2014 shows that the parameter homogeneity interval lengths account for approximately 1-6 months of daily observations. Our method outperforms models with one-year fixed intervals, as well as quantile based candidates while employing a time invariant portfolio protection (TIPP) strategy for the DAX portfolio. The tail risk measure implied by our model finally provides valuable insights for asset allocation and portfolio insurance.
Files in this item