Reference

Frédérique Bec, and Christian Gollier, Cyclicality and term structure of Value-at-Risk within a threshold autoregression setup, IDEI Working Paper, n. 835, September 2014.

Abstract

This paper explores empirically the link between stocks returns Value-at-Risk (VaR) and the state of financial markets across various holding horizons. The econometric analysis is based on a self-exciting threshold autoregression setup. Using quarterly French and US data from 1970Q4 to 2012Q4, it turns out that the k-year VaR of equities is actually dependent on the state of the market: the expected losses as measured by the VaR are smaller in bear market than in normal or bull market, whatever the horizon. These results suggest that the rules regarding the solvency capital requirements should adapt to the state of the financial market.

Keywords

Expected equities returns; Value at Risk; Financial cycle; Investment horizon; Threshold Autoregression;

JEL codes

  • G11: Portfolio Choice • Investment Decisions

Research partnership

Scor Chair

Research theme

Regulation, Liquidity and Solvency Risks

Replaced by

Frédérique Bec, and Christian Gollier, Cyclicality and term structure of Value-at-Risk within a threshold autoregression setup, Revue Banque, vol. 134, 2015, pp. 5–19.