Development of a trading strategy for risk-averse investors based on VaR models

Abstract

In this paper various topics related to programming, statistics and financial modelling were addressed with the main idea of establishing a trading strategy. As discussed in the paper, no research has been done on this topic. On the other hand, much research has been done on which model is better, which distribution or confidence level is more appropriate or provides better forecasting capabilities. No one has investigated whether these differences could lead to a development of trading strategy. The paper starts with a definition of the gap in literature and practice. Then the research methodology is outlined in detail. Formulas and parameters are defined and presented. The main conclusion of this paper is the importance of GARCH VaR and the possibility of creating trading strategies. As long as the difference between the GARCH VaR and the other two VaRs does not exceed 1.5%, there is no need to leave the market. Should this situation change, one should leave the market as long as these differences do not fall below 1.50%.