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A Study on Financial Market Risk Measurement on Condition of Heavy-tailed Distributions

Author: WangPin
Tutor: XuXuSong
School: Wuhan University
Course: Technology Economics and Management
Keywords: Fat tail distribution Financial Market Risk Empirical Analysis
CLC: F830.9
Type: Master's thesis
Year: 2005
Downloads: 422
Quote: 3
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Abstract


After 1970s, the Bretton Woods system marked the collapse of the fixed price system, as a symbol of the explosive growth of derivative financial instruments, financial innovation, and globalization of financial markets makes the volatility of the financial markets intensifying, market risk has become the main form of financial risks. Market risk management skills has become one of the core competencies of financial institutions to gain competitive advantage. Domestic and foreign large number of empirical studies have shown that the yield of the risky securities distribution has a heavy tail characteristics. The probability of extreme events in this case, the risk of securities price spike probability is much greater than under normally. Therefore, the thick-tailed distribution under the conditions of the financial market risk management will become more important. The same time, if you do not consider the fat tail distribution characteristics, the risk management model is bound to underestimate the risk, which may have very serious consequences. However, under the conditions of the thick-tailed distribution, the most commonly used market risk management models VaR does not satisfy convexity and subadditivity can not effectively measure the market risk. Therefore, under the conditions of the study thick tail distribution of financial market risk management model not only has a high theoretical value, but also has a strong practical value, is the hot issues of financial theory research. Risk measure is the foundation and core of the financial market risk management. This article will examine the thick tail distribution under the conditions of the financial market risk measure. The paper is divided into five chapters: Chapter 1 - The financial market risk management of financial risk, financial risk management and financial market risk management, basic concepts and theory. Chapter II - Financial Market Risk under the conditions of the study thick tail distribution market risk measure. Distributed according to the probability of the uncertainty of the results of the event and the reference point to define and measure risk analysis of the risk of the root causes of its essential attribute; coherent risk measure commonly used in financial market risk measure; deficiencies against VaR introduced the ES, TCE, and the CVaR three new risk measurement methods, a unified and standardized terminology redefine these three risk measure, and prove the differences and connections between the three. Chapter 3 - Empirical Test of Chinese stock yield fat tail distribution characteristics the yield calculated Finance and four fat tail distribution of the test method: inspection of normal probability paper, kurtosis test, GARCH inspection and stable distribution tail index test; empirical testing, and the heavy tail characteristics of the distribution of stock returns and found that the distribution of stock returns in China does have a thick tail characteristics. Chapter 4 - Market Risk empirical comparative analysis of the empirical analysis methods, sample data to the history of China's stock market data, VaR, ES and TCE convexity and subadditivity test; through back testing VaR ES two risk measure in an empirical test of the effectiveness of China's stock market. Chapter 5 - Summary and Outlook concludes the paper, the outlook for future research.

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CLC: > Economic > Fiscal, monetary > Finance, banking > Finance, banking theory > Financial market
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