Volatility Model for Financial Market Risk Management: An Analysis on JSX Index Return Covariance Matrix

Erie Febrian () and Aldrin Herwany ()
Additional contact information
Erie Febrian: Finance & Risk Management Study Group (FRMSG) FE UNPAD
Aldrin Herwany: Research Division, Laboratory of Management FE UNPAD

No 200907, Working Papers in Economics and Development Studies (WoPEDS) from Department of Economics, Padjadjaran University

Abstract: In measuring risk, practitioners have practiced one of the two extreme approaches for so long, i.e. historical simulation or risk metrics. Meanwhile, academicians tend to apply methods based on the latest development in financial econometrics. In this study, we try to assess one of important issues in financial econometric development that focuses on market risk measurement and management employing asset-based models, i.e. models that apply dimensional covariance matrix, which is relevant to practice world. We compare covariance matrix model with Exponential Smoothing Model and GARCH Derivation and the Associated Derivation Models, using JSX Stock price Index data in 2000-2005. The result of this study shows how applicable the observed financial econometric instrument in Financial Market Risk Management practice.

Keywords: Risk Management; Volatility Model (search for similar items in EconPapers)
JEL-codes: G0 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2009-09, Revised 2009-09
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Working Paper: Volatility Model for Financial Market Risk Management: An Analysis on JSX Index Return Covariance Matrix (2010)
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