Why Quantiles Are a Good Description of Volatility in Economics: An Alternative Explanation

Authors

Laxman Bokati, The University of Texas at El PasoFollow
Olga Kosheleva, The University of Texas at El PasoFollow
Vladik Kreinovich, The University of Texas at El PasoFollow
Kittawit Autchariyapanitkul, Maejo UniversityFollow

Publication Date

6-1-2022

Comments

Technical Report: UTEP-CS-22-67

Abstract

In econometrics, volatility of an investment is usually described by its Value-at-Risk (VaR), i.e., by an appropriate quantile of the corresponding probability distribution. The motivations for selecting VaR are largely empirical: VaR provides a more adequate description of what people intuitively perceive as risk. In this paper, we analyze this situation from the viewpoint of decision theory, and we show that this analysis naturally leads to the Value-at-Risk, i.e., to a quantile.

Interestingly, this analysis also naturally leads to an optimization problem related to quantile regression.