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A Non-Gaussian Approach to Risk Measures
Year Of Publication: 2006
Month Of Publication: July
Pages: 15
Download Count: 429
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 10-31-2006
Publisher: Administrator
Summary
Reliable calculations of financial risk require that the fat-tailed nature of prices changes is included in risk measures. To this end, a non-Gaussian approach to financial risk management is presented, modeling the power-law tails of the returns distribution in terms of a Student-t distribution. Non-Gaussian closed-form solutions for Value-at-Risk and Expected Shortfall are obtained and standard formulae known in the literature under the normality assumption are recovered as a special case. The implications of the approach for risk management are demonstrated through an empirical analysis of financial time series from the Italian stock market and in comparison with the results of the most widely used procedures of quantitative finance. Particular attention is paid to quantify the size of the errors affecting the market risk measures obtained according to different methodologies, by employing a bootstrap technique.
Author(s)
Bormetti, Giacomo Sign in to follow this author
Cisana, Enrica Sign in to follow this author
Montagna, Guido Sign in to follow this author
Nicrosini, Oreste Sign in to follow this author
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