Discussion Paper Details

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Title: Term Structure of Risk Under Alternative Econometric Specifications

Author(s): Massimo Guidolin and Allan Timmermann

Publication Date: September 2004

Keyword(s): nonlinear econometric models, simulation models and term structure of risk

Programme Area(s): Financial Economics

Abstract: This Paper characterizes the term structure of risk measures such as Value at Risk (VaR) and expected shortfall under different econometric approaches including multivariate regime switching, GARCH-in-mean models with student-t errors, two-component GARCH models and a non-parametric bootstrap. We show how to derive the risk measures for each of these models and document large variations in term structures across econometric specifications. An out-of-sample forecasting experiment applied to stock, bond and cash portfolios suggests that the best model is asset- and horizon specific but that the bootstrap and regime switching model are best overall for VaR levels of 5% and 1%, respectively.

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Bibliographic Reference

Guidolin, M and Timmermann, A. 2004. 'Term Structure of Risk Under Alternative Econometric Specifications'. London, Centre for Economic Policy Research.