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Risk Management in Emerging Markets: Computing Value-at-Risk in Fixed-Income Markets with Infrequent Trading
Year Of Publication: 2009
Month Of Publication: March
Pages: 37
Download Count: 20
View Count: 2009
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 6-6-2010
Publisher: Administrator
In this paper we show how to compute and back-test a Value-at-Risk (VaR) measure in a thinly traded
fixed-income market. Low frequency of transactions is a phenomenon which is especially common in
emerging markets. In a market where assets do not trade every day, data panels become incomplete
and traditional methodologies to compute the VaR cannot be implemented. We propose a three-phase
methodology which generates a complete panel of prices using a dynamic term-structure model, then
calculates portfolio VaR measures using this complete data panel, and finally back-tests these
measures using the original incomplete panel of prices. We provide an empirical implementation for
the Chilean fixed income market. The proposed methodology seems to provide reliable VaR measures
for thinly traded markets, and may provide the basis for further research on risk management in
emerging markets where thin trading is a serious issue.
Cortazar, Gonzalo Sign in to follow this author
Bernales, Alejandro Sign in to follow this author
Beuermann, Diether Sign in to follow this author
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