This paper provides a simple, yet reliable, alternative to the (Bayesian) estimation of large multivariate VARs with time variation in the conditional mean equations and/or in the covariance structure. With our new methodology, the original multivariate, n-dimensional model is treated as a set...

I propose applying the Mixed Data Sampling (MIDAS) framework to forecast Value at Risk (VaR) and Expected shortfall (ES). The new methods exploit the serial dependence in short-horizon returns to directly forecast the tail dynamics at the desired horizon. I perform a comprehensive comparison of...

Surveys of professional forecasters produce precise and timely point forecasts for key macroeconomic variables. However, the accompanying density forecasts are not as widely utilized, and there is no consensus about their quality. This is partly because such surveys are often conducted for...

This study highlights some deficiencies of the stock markets' risk legislation framework, and particularly the CESR (2010) guidelines. We show that the current legislative framework fails to offer incentives to financial management companies to invest in advanced models for more representative...

Abstract In 1995, the Basel Accords introduced an alternative method to compute the market risk charge through the use of a risk model developed internally by the financial institution. These internal models, based on the Value-at-Risk (VaR), follow certain rules that are defined under the Basel...

We take a look at some non-hedgeable risks, some of which may be independent of the trading strategy. After a brief review of second order greeks and of a formula for short-term (daily) P&L, we first give examples of residual delta risks due to system valuation/booking procedures. We then focus...

We propose forecast encompassing tests for the Expected Shortfall (ES) jointlywith the Value at Risk (VaR) based on flexible link (or combination) functions.Our setup allows testing encompassing for convex forecast combinations and forlink functions which preclude crossings of the combined VaR...

This paper develops a model for optimal portfolio allocation for an investor with quantile preferences, i.e., who maximizes the τ-quantile of the portfolio return, for τ ∈ (0,1). Quantile preferences allow to study heterogeneity in individuals' portfolio choice by varying the quantiles, and...

In this paper, we introduce a new class of risk measures and the corresponding risk minimizing portfolio optimization problem. Instead of measuring the expected deviation of a daily return from a single target value, we propose to measure its deviation from a range of values centered on the...

In financial decisions, model risk has been recognized as an important source of uncertainty. The revision of the Basel II suggests that financial institutions quantify and manage their model risk. Focusing on risk forecasting literature, we identify two main approaches to quantify model risk:...