Measuring market risk with GARCH models under Basel III: selection and application to German firms

The main objective of this study is to examine GARCH-type models in market risk assessment with a distribution of returns for German companies in the DAX 40 list. Our study contributes to three major areas. The first step was to highlight the empirically observed stylized facts in the high-frequency financial data for eight DAX 40 assets. We were able to analyze the dynamics and asymmetry of returns on high-frequency financial assets. Then, we compared the GARCH model with the EGARCH and APARCH models based on stylized facts regarding volatility behavior in high-frequency financial assets. The EGARCH model is well suited for capturing all the stylized facts of the eight financial assets. The use of high-frequency data in risk measurement provides more accurate data and adapted calculation methods. The combination of the value at risk with the EGARCH model provides a clearer idea of the potential loss and the average loss beyond a threshold and a better understanding of the degree of exposure of assets to risk. These findings suggest that EGARCH-type models allow for an accurate analysis of market risk assessment with a distribution of returns for German companies in the DAX 40 list.