Backtesting VaR under the COVID-19 sudden changes in volatility

We analyze the impact of the COVID-19 pandemic on the conditional variance of stock returns. We look at this effect from a global perspective, so we employ series of major stock market and sector indices. We use the Hansen's Skewed-t distribution with EGARCH extended to control for sudden changes in volatility. We oversee the COVID-19 effect on measures of downside risk such as the Value-at-Risk. Our results show that there is a significant sudden shift up in the return distribution variance post the announcement of the pandemic, which must be explained properly to obtain reliable measures for financial risk management.

Automated summary

Our analysis of the impact of the COVID-19 pandemic on the conditional variance of stock returns suggests a significant sudden shift post the announcement of the pandemic, emphasizing the need for proper explanation to obtain reliable measures for financial risk management.