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Managing the risk based on entropic value-at-risk under a normal-Rayleigh distribution

Dilan Ahmed, Fazlollah Soleymani, Malik Zaka Ullah and Hataw Hasan

Applied Mathematics and Computation, 2021, vol. 402, issue C

Abstract: Market observations basically reveal that the data do not follow a normal distribution and fat tails occur. On the other hand, the common measures of risk, like, value-at-risk (VaR) and conditional value-at-risk (CVaR) may not yield in reliable values in managing the risk of a portfolio under some conditions. To overcome these shortcomings, two ideas are furnished in this work. First, a mixture distribution is constructed based on the normal and Rayleigh distributions to provide fatter tails and to be more consistent on market data. And second, the entropic VaR (EVaR) is used to give reliable values for risk management. Finally, several simulation workouts on different stocks from real data are presented and compared to uphold the discussions of this work.

Keywords: Risk; Mixture distribution; GARCH model; Rayleigh distribution; Entropic value-at-risk (EVaR) (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.amc.2021.126129

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