Misspecified likelihood function and value-at-risk Italian banks' interest rate risk exposure

Ebenezer Asem

Abstract

ABSTRACT

Estimating value-at-risk (VAR) requires a precise forecast of the future risk structure. Many VAR estimation techniques impose ad hoc theoretical distributions. In GARCH frameworks, a wrong distributional assumption will generate inefficient parameter estimates and, conditionally, impose a wrong structure on the future dispersion of risk. To address problems associated with the latter, Barone-Adesi, Giannopoulos and Vosper (1999) propose a bootstrap procedure for forecasting the future risk structure. This paper studies the effects of inefficient parameter estimates from a wrong likelihood assumption on the VAR estimates. The results suggest that inefficient parameter estimates do not have adverse effects on the efficiency of the VAR forecasts.