Preliminary communication

Optimisation of decay factor in time weighted (BRW) simulation: implications for VAR performance in mediterranean countries

Saša Žiković
Zdenko Prohaska

Abstract

In this paper we propose an optimisation approach to determining the optimal decay factor in time weighted (BRW) simulation. Testing of BRW simulation with different decay factors and competing VaR models is performed on a sample of nine Mediterranean countries, over a four year period that includes the ongoing financial crisis. After optimisation the BRW simulation is among the best performing tested VaR models, second only to EVT approaches. Optimising the decay factor in regards to Lopez function results in decay factor estimates that are higher than usually employed 0.97 and 0.99. The optimal decay factors are stable over time and provide significantly better backtesting results than the standard assumptions.

Keywords

Risk management; Value at Risk; time weighted (BRW) simulation; optimisation; decay factor; Mediterranean

Hrčak ID:

51407

URI

https://hrcak.srce.hr/51407

Publication date:

1.4.2010.

Article data in other languages: croatian

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