Risk Measures And Valuation Under Interest Rates And Equity Risk Factors

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Risk Measures and Valuation under Interest Rates and Equity Risk Factors

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Abstract

In this study we try to explore the theory of “Risk Measures and Valuation under Interest Rates and Equity Risk Factors” in a holistic context. The main focus of the research is on the Value at Risk and Expected Shortfall risk measures in general, and how they are applied to a derivative portfolio. The research also analyzes the number of different calculation methods and techniques used to calculate the Value at Risk measure. This Study tries to examine the various types of risk that the portfolio may be exposed to. The study followed the secondary research methodology. This research also contains a detailed empirical research related to various models that can be used in order to measure the risk within a given portfolio.

Table of Contents

ABSTRACTii

INTRODUCTION1

VALUE-AT-RISK: THEORYUAL AND INSTITUTIONAL BACKGROUND3

LITERATURE REVIEW5

Extreme Value Theory (EVT) and Risk Management7

Calculation of VaR11

Variance-Covariance12

Historical Simulation13

Monte Carlo Simulation13

RiskMetrics14

Extreme VaR15

GARCH-EVT Methodology15

Expected Shortfall (ES)16

Backtest Risk Models17

Shortcomings of VaR18

Different Forms of Risks19

Credit Risk19

Operational Risk19

Market Risk19

FUNCTIONALITY OF VALUE AT RISK METHOD20

EMPIRICAL RESEARCH21

Stochastic Development Models21

Robust Optimization Models23

Other Modelling Approaches23

Models Depending on Conditional Value-at-Risk24

Extreme Value Theory and Risk Measures26

Wavelet Transform28

Optimal Portfolio Problem31

CONCLUSION32

REFERENCES35

Introduction

In the 90's, a variety of notorious financial mishaps were tied to the use and disclosure types. As Jorion (1997) stated, such awkward debacles could possibly have been prevented if mixture disclosure had been done properly and quickly. The present international financial trouble is also linked to a lot of investments in types appropriate to subprime mortgages (Gorton, 2008). In Nov 2008, the Group-20 (G20) Peak outlined the necessity of enhancing risk disclosure of complicated financial equipment by loan companies to capital marketplaces. During previous times two decades, the Basel Panel, govt authorities, and bookkeeping conventional setters all over the globe have created great efforts to improve risk control methods and risk confirming techniques in the financial market. This paper plays a role in the literary works by studying the informativeness of value-at-risk (VaR) disclosure in the financial market, one of the most essential projects developed through a sequence of risk-management rules and policies.

As a resource for risk evaluate and disclosure, VaR provides the highest possible prospective reduction on a portfolio over some having period from regular market motions. Its most appealing function is its capability to combination risks across various kinds of financial equipment and company actions. Hence, the Basel Panel, govt authorities, and bookkeeping conventional setters across the globe have established a sequence of laws and regulations about the disclosure of VaR in exterior reviews of organizations since the 1993 List of 30 evaluation. In the Basel II Union, the Basel Panel on Banking Guidance (BCBS) holds “market discipline” as a primary main, “Basel III”, supporting to supervisory and regulating tools for tracking and restricting risk. The main has greatly increased the reports that the lender must create about risk exposures and has allowed the market to have a better image of the overall risk position of the lender (BCBS, 2001). Consequently, banks' disclosure of VaR and other forward-looking risk actions ...
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