Forecasting Value-at-Risk under Temporal and Portfolio Aggregation*

Erik Kole, Thijs Markwat, Anne Opschoor, Dick Van Dijk

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We examine the impact of temporal and portfolio aggregation on the quality of Value-at-Risk (VaR) forecasts over a horizon of 10 trading days for a well-diversified portfolio of stocks, bonds and alternative investments. The VaR forecasts are constructed based on daily, weekly, or biweekly returns of all constituent assets separately, gathered into portfolios based on asset class, or into a single portfolio. We compare the impact of aggregation with that of choosing a model for the conditional volatilities and correlations, the distribution for the innovations, and the method of forecast construction. We find that the level of temporal aggregation is most important. Daily returns form the best basis for VaR forecasts. Modeling the portfolio at the asset or asset class level works better than complete portfolio aggregation, but differences are smaller. The differences from the model, distribution, and forecast choices are also smaller compared with temporal aggregation.

Original languageEnglish
Pages (from-to)649-677
Number of pages29
JournalJournal of Financial Econometrics
Volume15
Issue number4
DOIs
Publication statusPublished - 2017

Keywords

  • aggregation
  • forecast evaluation
  • model comparison
  • value-at-risk

Cite this