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First-Passage Probability, Jump Models, and Intra-Horizon Risk
Year Of Publication: 2009
Month Of Publication: August
Pages: 51
Download Count: 2
View Count: 1384
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 11-13-2012
Publisher: Administrator
Summary
This paper proposes a risk measure, based on first-passage probability, which reflects intra-horizon risk in jump models with finite or infinite jump activity. Our empirical investigation shows, first, that the proposed risk measure consistently exceeds the benchmark Value-at-Risk (VaR). Second, jump risk tends to amplify intra-horizon risk. Third, we find large variation in our risk measure across jump models, indicative of model risk. Fourth, among the jump models we consider, the finite-moment log-stable model provides the most conservative risk estimates. Fifth, imposing more stringent VaR levels accentuates the impact of intra-horizon risk in jump models. Finally, using an alternative benchmark VaR does not dilute the role of intra-horizon risk. Overall, we contribute by showing that ignoring intra-horizon risk can lead to underestimation of risk exposures.
This document is published in Journal of Financial Economics (volume 95, number 1) 2010, 20-40.
http://dx.doi.org/10.1016/j.jfineco.2009.01.003
Author(s)
Bakshi, Gurdip Sign in to follow this author
Panayotov, George Sign in to follow this author
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