Estimating downside risk in stock returns under structural breaks

Document Type

Article

Source of Publication

International Review of Economics and Finance

Publication Date

11-1-2018

Abstract

© 2018 Elsevier Inc. We show with simulations that inducing structural breaks in the volatility of returns causes non-normality by significantly increasing kurtosis. We endogenously detect significant structural breaks in the volatility of US stock returns and incorporate this information to estimate Value-at-Risk (VaR) to measure the downside risk. Out-of-sample performance results indicate that our proposed model, which incorporates both time varying volatility and structural breaks in volatility, produces more accurate VaR forecasts than several benchmark methods. We highlight the economic importance of our results by calculating the daily capital charges using the Basel Accords.

ISSN

1059-0560

Publisher

Elsevier Inc.

Volume

58

First Page

102

Last Page

112

Disciplines

Business

Keywords

GARCH, Structural breaks, Volatility

Scopus ID

85043522497

Indexed in Scopus

yes

Open Access

no

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