Handbook of Heavy Tailed Distributions in Finance

Chapter 7

Stable Modeling of Market and Credit Value at Risk

Svetlozar T. Rachev [e-mail]    Department of Statistics and Applied Probability, University of California, Santa Barbara, USAInstitute of Statistics and Mathematical Economics, University of Karlsruhe, Germany

Eduardo S. Schwartz    Anderson School of Management, University of California, Los Angeles, USA

Irina Khindanova    Colorado School of Mines

Abstract

The chapter examines the use of stable Paretian distributions in modeling market and credit Value at Risk (VaR). The in-sample- and forecast-evaluations show that stable market VaR modeling outperforms the “normal” modeling for high values of the VaR confidence level. The chapter also develops a new technique ...