Bootstrap historical simulation

• Main Authors: Radivojević Nikola, Dević Željko, Muhović Almir
• Format: Article
• Language: English
• Published: Association of Serbian Banks 2016-01-01
• Series: Bankarstvo
• Subjects: Value at Risk; historical simulation; bootstrap method; market risk
• Online Access: http://scindeks-clanci.ceon.rs/data/pdf/1451-4354/2016/1451-43541603036R.pdf

In this paper the authors present a new VaR model for the estimation of market risk in banks and other financial institutions. The model is labeled BootstrapHS500, since it is theoretically based on historical simulation and implementation of the bootstrap method. The aim of the paper is to provide answers to the question whether incorporating the bootstrap method in the standard model of historical simulation contributes to the improvement of the historical simulation's applicability in terms of meeting the backtesting rules of the Basel II standards. In order to obtain the answer to this question, in this paper we conducted and dealt with the testing of applicability and comparison of performances of the HS500 and the BootstrapHS500 models at the capital markets of Serbia, Croatia, Greece, Spain, Germany, Slovakia, the Czech Republic, Romania and Hungary. The research methodology involves the use of the appropriate quantitative analysis and tests of unconditional and conditional coverage. The results of the research show that the BootstrapHS500 model achieved a better performance than the standard model of historical simulation, from the perspective of both backtesting tests. It can be concluded that incorporating the bootstrap method in the standard model of historical simulation contributes to the improvement of the historical simulation' applicability.