1
$\begingroup$

If we want to calculate an $x$-day VaR ($x$ is some time period in days) from an Exponentially Weighted Moving Average (EWMA) of vector of returns, what should the half-life in the decay factor in EWMA be?

When calculating the decay factor $\lambda$ from the half life $t_{1/2}$, we have

$$\lambda = \exp\left(\frac{\log(0.5)}{t_{1/2}}\right)$$

What should $t_{1/2}$ be given the VaR period? For example, if we set the VaR period to 10 days, should $t_{1/2}$ also be 10 days? If not, why not?

$\endgroup$

Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Browse other questions tagged or ask your own question.