Optimisation of Decay Factor in Time Weighted (Brw) Simulation: Implications for Var Performance in Mediterranean Countries
Year: 2010
Type: article
Abstract: In this paper we propose an optimisation approach to determining the optimal decay factor in time weighted (BRW) simulation. Testing of BRW simulation with different decay factors and competing VaR models is performed on a sample of nine Mediterranean countries, over a four year period that includes the ongoing financial crisis. After optimisation the BRW simulation is among the best performing tested VaR models, second only to EVT approaches. Optimising the decay factor in regards to Lopez function results in decay factor estimates that are higher than usually employed 0.97 and 0.99. The optimal decay factors are stable over time and provide significantly better backtesting results than the standard assumptions.
Authors: Saša Žiković, Zdenko Prohaska
Institution: University of Rijeka
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $944
OpenAlex ID: W1727724