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Performance Analysis of Economic VaR Estimation using Risk Neutral Probability Distributions

  • Heo, Se-Jeong (Department of Applied Statistics, Konkuk University) ;
  • Yeo, Sung-Chil (Department of Applied Statistics, Konkuk University) ;
  • Kang, Tae-Hun (School of Business Administration, Kyungsung University)
  • Received : 2012.07.31
  • Accepted : 2012.09.12
  • Published : 2012.10.31

Abstract

Traditional value at risk(S-VaR) has a difficulity in predicting the future risk of financial asset prices since S-VaR is a backward looking measure based on the historical data of the underlying asset prices. In order to resolve the deficiency of S-VaR, an economic value at risk(E-VaR) using the risk neutral probability distributions is suggested since E-VaR is a forward looking measure based on the option price data. In this study E-VaR is estimated by assuming the generalized gamma distribution(GGD) as risk neutral density function which is implied in the option. The estimated E-VaR with GGD was compared with E-VaR estimates under the Black-Scholes model, two-lognormal mixture distribution, generalized extreme value distribution and S-VaR estimates under the normal distribution and GARCH(1, 1) model, respectively. The option market data of the KOSPI 200 index are used in order to compare the performances of the above VaR estimates. The results of the empirical analysis show that GGD seems to have a tendency to estimate VaR conservatively; however, GGD is superior to other models in the overall sense.

Acknowledgement

Supported by : Konkuk University

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