VALUE AT RISK WITH STOCHASTIC VOLATILITY PERTURBED BY HURST PARAMETER

The commonly adopted value at risk (VaR) model assumes the distribution of portfolio values that are normally distributed with stationary and independent increment, which restricts its usage for cases of arbitrary distributions. In this study, the current assumption is improved by constructing theoretical development of VaR model based on fractional Brownian motion, with Hurst parameter, H, as its underlying distribution. Empirical investigation is conducted to compare the standard model with the proposed model. The findings indicated that higher value of H provided higher value in VaR, thus suggesting greater probability to lose.