Risk Modeling of Commodities using CAViaR Models, the Encompassing Method and the Combined Forecasts

Abstract

A b s t r a c t. The aim of the research is to compare VaR methods/models for commodities. For risk measurement Conditional Autoregressive Value at Risk models (CAViaR), implied quantile model and encompassing method are used. The aim is to check whether simultaneous use of information both from historical time series and regarding markets' expectation can improve accuracy of forecasts. For this purpose four methods of combining forecasts are used: a simple average combining, an unrestricted linear combination, a weighted averaged combining and a weighted averaged combining using exponential weighting. In the case of the commodities neither the encompassing method nor the combining forecast method improve VaR forecasts. The method of choosing the most adequate model leads to simple CAViaR-SAV model as the source of most optimal measure of risk forecasts. The Kupiec test, the Christoffersen and the Dynamic Quantile test indicate the model as an adequate to forecast VaR for gold and oil for short positions at the 0.01 and the 0.05 significance level, and for a long position at the 0.05 significance level.K e y w o r d s: CAViaR, VaR, encompassing method, combined forecasts, commodities J E L Classification: C22, G17.