| Abstract: |
There is a discrepancy between two important horizon for Value at Risk modelling in the Basel context. We take 10-day values for determining the regulatory capital but we consider 1-day models for backtesting. The main objective of this thesis is to examine the suitability of the currently used Square Root of Time rule for Value at Risk scaling. We compare its performance with the method utilizing Hurst exponent. Our analysis is performed for both the normal and stable distribution. We conclude that the normality assumption and the Square Root of Time rule prevail under the regulatory parameters. The results of the Hurst exponent method are not favourable under normality. On the other hand, the performance for the stable distribution is quite satisfactory under non-Basel parameters and the Hurst exponent complements this distribution very well. Therefore, the use of stable distribution and the Hurst exponent method is justified when dealing with complex non-linear instruments, during turbulent periods, or for general non-Basel setting. In general however, our results are strongly data-dependent and further evidence is needed for any conclusive implications. |
