Exponentially Smoothing the Skewed Laplace Distribution for Value‐at‐Risk Forecasting. (25th June 2013) - Gerlach, Richard
ABSTRACT: Value‐at‐risk (VaR) is a standard measure of market risk in financial markets. This paper proposes a novel, adaptive and efficient method to forecast both volatility and VaR. Extending existing exponential smoothing as well as GARCH formulations, the method is motivated from an asymmetric Laplace distribution, where skewness and heavy tails in return distributions, and their potentially time‐varying nature, are taken into account. The proposed volatility equation also involves novel time‐varying dynamics. Back‐testing results illustrate that the proposed method offers a viable, and more accurate, though conservative, improvement in forecasting VaR compared to a range of popular alternatives. Copyright © 2013 John Wiley & Sons, Ltd.