Monday, 16:15 - 16:40 h, Room: H 3027

 

William Pouliot
Value-at-Risk

 

Abstract:
The implementation of appropriate statistical techniques
(backtesting) for monitoring conditional VaR models is the mechanism
used by financial institutions to determine the severity of the
departures of the VaR model from market results and, subsequently
the tool used by regulators to determine the penalties imposed for
inadequate risk models. So far, however, there has been no attempt
to determine the timing of this rejection and with it to obtain some
guidance regarding the cause of failure in reporting an appropriate
VaR. This paper corrects this by proposing U-statistic type
processes that extend standard CUSUM statistics widely employed for
change-point detection. In contrast to CUSUM statistics these new
tests are indexed by certain weight functions that enhance their
statistical power to detect the timing of the market risk model
failure. These tests are robust to estimation risk and can be
devised to be very sensitive to detection of market failure produced early
in the out-of-sample evaluation period, in which standard methods
usually fail due to the absence of data.

 

Talk 3 of the invited session Mon.3.H 3027
"Risk management in finance and insurance" [...]
Cluster 7
"Finance & economics" [...]

 

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