Publication: Volatility modelling and accurate minimun capital risk requirements : a comparison among several approaches
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2007-05
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Abstract
In this paper we estimate, for several investment horizons, minimum capital risk requirements for
short and long positions, using the unconditional distribution of three daily indexes futures returns
and a set of GARCH-type and stochastic volatility models. We consider the possibility that errors
follow a t-Student distribution in order to capture the kurtosis of the returns distributions. The
results suggest that an accurate modeling of extreme returns obtained for long and short trading
investment positions is possible with a simple autoregressive stochastic volatility model.
Moreover, modeling volatility as a fractional integrated process produces, in general, excessive
volatility persistence and consequently leads to large minimum capital risk requirement estimates.
The performance of models is assessed with the help of out-of-sample tests and p-values of them
are reported.
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Minimum capital risk requirement, Moving block bootstrap, Stochastic volatility, Volatility persistence