# 15-140/III (2015-01-04; 2017-04-19)

Author(s)
Erik Kole, Erasmus University Rotterdam, the Netherlands; Thijs Markwat, Robeco Asset Management, the Netherlands; Anne Opschoor, VU University Amsterdam, the Netherlands; Dick van Dijk, Erasmus University Rotterdam, the Netherlands
Keywords:
forecast evaluation, aggregation, Value-at-Risk, model comparison
JEL codes:
C22, C32, C52, C53, G17

We examine the impact of temporal and portfolio aggregation on the quality of Valueat-Risk (VaR) forecasts over a horizon of ten trading days for a well-diversified portfolio of stocks, bonds and alternative investments. The VaR forecasts are constructed based on daily, weekly or biweekly returns of all constituent assets separately, gathered into portfolios based on asset class, or into a single portfolio. We compare the impact of aggregation to that of choosing a model for the conditional volatilities and correlations,the distribution for the innovations and the method of forecast construction. We find that the level of temporal aggregation is most important. Daily returns form the best basis for VaR forecasts. Modeling the portfolio at the asset or asset class level works better than complete portfolio aggregation, but differences are smaller. The differences from the model, distribution and forecast choices are also smaller compared to temporal
aggregation.