Instructions
*** It is a violation of academic integrity policies to look at the solutions from previous years when finishing this assignment. ˆ
The end goal is to measure next week’s tail risk by calculating the VaR and ES five days into the future. To do that, we need to construct the return distribution into the future. The methods of constructing the distribution include
(a) Historical Simulation (HS)
(b) GARCH + Monte Carlo Simulation (MCS) based on conditional normality assumptions
(c) GARCH + Filtered Historical Simulation (FHS)
We are first going to compare the three methods by looking at their in-sample daily VaR performances.
Based on that, we are going the conduct (b) and (c) for the 5-day cumulative VaR and ES into the future.
I upload TWO files, please go through these two BEFORE take the order, thanks.