Grønneberg, Steffen and Sucarrat, Genaro (2014): Risk Estimation when the Zero Probability of Financial Return is TimeVarying.
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Abstract
The probability of an observed financial return being equal to zero is not necessarily zero. This can be due to liquidity issues (e.g. low trading volume), market closures, data issues (e.g. data imputation due to missing values), price discreteness or rounding error, characteristics specific to the market, and so on. Moreover, the zero probability may change and depend on market conditions. In ordinary models of risk (e.g. volatility, ValueatRisk, Expected Shortfall), however, the zero probability is zero, constant or both. We propose a new class of models that allows for a timevarying zero probability, and which nests ordinary models as special cases. The properties (e.g. volatility, skewness, kurtosis, ValueatRisk, Expected Shortfall) of the new class are obtained as functions of the underlying volatility and zero probability models. For a given volatility level, our results imply that risk estimates can be severely biased if zeros are not accommodated: For rare loss events (i.e. 5% or less) we find that Conditional ValueatRisk is biased downwards and that Conditional Expected Shortfall is biased upwards. An empirical application illustrates our results, and shows that zeroadjusted risk estimates can differ substantially from risk estimates that are not adjusted for the zero probability.
Item Type:  MPRA Paper 

Original Title:  Risk Estimation when the Zero Probability of Financial Return is TimeVarying 
English Title:  Risk Estimation when the Zero Probability of Financial Return is TimeVarying 
Language:  English 
Keywords:  Financial return, volatility, zeroinflated return, ValueatRisk, Expected Shortfall 
Subjects:  C  Mathematical and Quantitative Methods > C0  General > C01  Econometrics C  Mathematical and Quantitative Methods > C2  Single Equation Models ; Single Variables > C22  TimeSeries Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes C  Mathematical and Quantitative Methods > C3  Multiple or Simultaneous Equation Models ; Multiple Variables > C32  TimeSeries Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C51  Model Construction and Estimation C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C52  Model Evaluation, Validation, and Selection C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C58  Financial Econometrics 
Item ID:  81882 
Depositing User:  Dr. Genaro Sucarrat 
Date Deposited:  12 Oct 2017 18:37 
Last Modified:  12 Oct 2017 18:37 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/81882 
Available Versions of this Item

Models of Financial Return With TimeVarying Zero Probability. (deposited 21 Jan 2016 14:32)

Models of Financial Return With TimeVarying Zero Probability. (deposited 04 Mar 2017 09:08)
 Risk Estimation when the Zero Probability of Financial Return is TimeVarying. (deposited 12 Oct 2017 18:37) [Currently Displayed]

Models of Financial Return With TimeVarying Zero Probability. (deposited 04 Mar 2017 09:08)