Stochastic models for risk estimation in volatile markets: a survey

Stochastic models for risk estimation in volatile markets: a survey

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Article ID: iaor20103198
Volume: 176
Issue: 1
Start Page Number: 293
End Page Number: 309
Publication Date: Apr 2010
Journal: Annals of Operations Research
Authors: , , ,
Keywords: risk
Abstract:

Portfolio risk estimation in volatile markets requires employing fat-tailed models for financial returns combined with copula functions to capture asymmetries in dependence and an appropriate downside risk measure. In this survey, we discuss how these three essential components can be combined together in a Monte Carlo based framework for risk estimation and risk capital allocation with the average value-at-risk measure (AVaR). AVaR is the average loss provided that the loss is larger than a predefined value-at-risk level. We consider in some detail the AVaR calculation and estimation and investigate the stochastic stability.

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