Estimation of VaR by Employing Economic News in GARCH models

We examine the influence of news, related to the main central banks, on the conditional volatility of the stock returns of eighteen major European banks using GARCH, EGARCH and TGARCH framework. Numbers are further applied into the Value-at-Risk (VaR) measure for given banks returns. The two types of news variables we use are constructed from the press releases of main central banks and from the search query at Factiva Dow Jones news database. Using the EGARCH setup we are able to model individual volatility reaction functions of the banks stock returns to different news variables. The results confirm that increase in the amount of media coverage causes increase in volatility. Certain news types have calming effect (speeches of the central banks representatives) on volatility while others stir it (monetary news). Finally, adding the news into the modeling only slightly improves the VaR out-of-sample performance.

Autorentext

Ond ej indelka studied Finance at the IES and Media at the ICS, at the Faculty of Social Sciences, Charles University in Prague and International Economics and Business at the USE, Utrecht University. His research comprises studying empirically the interaction of the media and finance with emphasis on the risk management application.