Which GARCH model is best for value at risk?

In a more recent study, Orhan & Köksal (2012) concluded that the ARCH model and leptokurtic error distributions yielded the best results for VaR estimations after testing a wide range of volatility models.

What does the GARCH model tell us?

GARCH models describe financial markets in which volatility can change, becoming more volatile during periods of financial crises or world events and less volatile during periods of relative calm and steady economic growth. Moreover, the increased volatility may be predictive of volatility going forward.

What is conditional volatility in GARCH?

Conditional volatility is the volatility of a random variable given some extra information. In the GARCH model, the conditional volatility is conditioned on past values of itself and of model errors. Unconditional volatility is the general volatility of a random variable when there is no extra information.

How does value at risk work?

Value at risk (VaR) is a measure of the risk of loss for investments. For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, that means that there is a 0.05 probability that the portfolio will fall in value by more than $1 million over a one-day period if there is no trading.

How is value at risk calculated in GARCH model?

Given that , as lag increases the effect of the squared residual decreases. Value at Risk (VaR) is a statistical measure of downside risk based on current position. It estimates how much a set of investments might lose given normal market conditions in a set time period.

What is the difference between Var and RiskMetrics?

The aim of RiskMetrics is to improve the transparency of market risks, create a benchmark for measuring them, and provide investors with better information on managing market risks. VaR is, at its core, focuses on the potential downside risk of an investment.

Why is MSCI the owner of RiskMetrics?

RiskMetrics is now owned by MSCI. The aim of RiskMetrics is to improve the transparency of market risks, create a benchmark for measuring them, and provide investors with better information on managing market risks. VaR is, at its core, focuses on the potential downside risk of an investment.

How is RiskMetrics used in the stock market?

The companies teamed up to make the data used in RiskMetrics widely available to individual investors. RiskMetrics is now owned by MSCI. The aim of RiskMetrics is to improve the transparency of market risks, create a benchmark for measuring them, and provide investors with better information on managing market risks.