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Market Risk: Exponential Weightinh in the Value-at-Risk Calculation

When measuring market risk, credit institutions and Alternative Investment Fund Managers may deviate from equally weighting historical data in their Value-at-Risk calculation and instead use an exponential time series weighting. The use of expo-nential weighting in the Value-at-Risk calculation is very popular because it takes into account changes in market volatility (immediately) and can therefore quickly adapt to VaR. In less volatile market phases, this leads to a reduction in VaR and thus to lower own funds requirements for credit institutions. However, in the ex-ponential weighting a high volatility in the past is quickly forgotten and the VaR can be underestimated when using exponential weighting and the VaR may be un-derestimated. To prevent this, credit institutions or Alternative Investment Fund Managers are not completely free to choose a weighting (decay) factor. This article describes the legal requirements and deals with the calculation of the permissible weighting factor. As an example we use the exchange rate between Euro and Polish zloty to estimate the Value-at-Risk. We show the calculation of the weighting factor with two different approaches. This article also discusses exceptions to the general legal requirements.

Identiferoai:union.ndltd.org:DRESDEN/oai:qucosa:de:qucosa:72009
Date03 September 2020
CreatorsBroll, Udo, Förster, Andreas, Siebe, Wilfried
PublisherTechnische Universität Dresden
Source SetsHochschulschriftenserver (HSSS) der SLUB Dresden
LanguageEnglish
Detected LanguageEnglish
Typedoc-type:workingPaper, info:eu-repo/semantics/workingPaper, doc-type:Text
Rightsinfo:eu-repo/semantics/openAccess
Relationurn:nbn:de:bsz:14-qucosa-209808, 2510-1196, qucosa:29779

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