Estimating value-at-risk for chinese stock market by switching regime ARCH model

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April 2006, 2(2): 145-163. doi: 10.3934/jimo.2006.2.145

Estimating value-at-risk for chinese stock market by switching regime ARCH model

W.C. Ip ^1, , H. Wong ^1, , Jiazhu Pan ^2, and Keke Yuan ^2,

1.	Department of Applied Mathematics, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong, China, China
2.	LMAM and Department of Financial Mathematics, School of Mathematical Sciences, Peking University, Beijing 100871, China, China

Received May 2005 Revised September 2005 Published April 2006

Abstract
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This paper proposes a method of estimating Value at Risk (VaR) based on the assumption that the financial returns follow a switching regime ARCH model. We use the simple switching-regime model, the traditional GARCH(1,1) model and the switching-regime ARCH model to do some empirical analysis and to calculate the VaR values under different confidence levels for Shanghai and Shenzhen Stock Index. The calculated VaR values are compared. The results of back-testing and the Proportion of Failure test show the VaR values calculated by the switching-regime ARCH model are preferred to other methods.

Keywords: Value-at-Risk, switching regime, back-testing, ARCH model, leptokurtosis, proportion of failure test., volatility clustering, fat-tailed distribution.

Mathematics Subject Classification: 62M1.

Citation: W.C. Ip, H. Wong, Jiazhu Pan, Keke Yuan. Estimating value-at-risk for chinese stock market by switching regime ARCH model. Journal of Industrial & Management Optimization, 2006, 2 (2) : 145-163. doi: 10.3934/jimo.2006.2.145

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