A Non-Gaussian Approach to Risk Measures

G. Bormetti, E. Cisana, G. Montagna and O. Nicrosini

Papers from arXiv.org

Abstract: Reliable calculations of financial risk require that the fat-tailed nature of prices changes is included in risk measures. To this end, a non-Gaussian approach to financial risk management is presented, modeling the power-law tails of the returns distribution in terms of a Student-t distribution. Non-Gaussian closed-form solutions for Value-at-Risk and Expected Shortfall are obtained and standard formulae known in the literature under the normality assumption are recovered as a special case. The implications of the approach for risk management are demonstrated through an empirical analysis of financial time series from the Italian stock market and in comparison with the results of the most widely used procedures of quantitative finance. Particular attention is paid to quantify the size of the errors affecting the market risk measures obtained according to different methodologies, by employing a bootstrap technique.

Date: 2006-05, Revised 2006-07
References: View complete reference list from CitEc
Citations:

Published in Physica A, 376 (2007) p. 532-542

Downloads: (external link)
http://arxiv.org/pdf/physics/0605146 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:physics/0605146

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().