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Value at risk and self-similarity

Menkens, Olaf (2007) Value at risk and self-similarity. In: Miller, John and Edelman, David and Appleby, John A.D., (eds.) Numerical methods for finance. Chapman & Hall/CRC Financial Mathematics Series, 8 . CRC Press, pp. 225-253. ISBN 9781584889250

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Abstract

The concept of Value at Risk measures the "risk" of a portfolio and is a statement of the following form: With probability q the potential loss will not exceed the Value at Risk figure. It is in widespread use within the banking industry. It is common to derive the Value at Risk figure of d days from the one of one–day by multiplying with √d. Obviously, this formula is right, if the changes in the value of the portfolio are normally distributed with stationary and independent increments. However, this formula is no longer valid, if arbitrary distributions are assumed. For example, if the distributions of the changes in the value of the portfolio are self–similar with Hurst coefficient H, the Value at Risk figure of one–day has to be multiplied by dH in order to get the Value at Risk figure for d days. This paper investigates to which extent this formula (of multiplying by √d) can be applied for all financial time series. Moreover, it will be studied how much the risk can be over– or underestimated, if the above formula is used. The scaling law coefficient and the Hurst exponent are calculated for various financial time series for several quantiles.

Item Type:Book Section
Refereed:Yes
Uncontrolled Keywords:Square–root–of–time rule; time–scaling of risk; scaling law; Value at Risk; self–similarity; order statistics; Hurst exponent estimation in the quantiles;
Subjects:Mathematics
DCU Faculties and Centres:DCU Faculties and Schools > Faculty of Science and Health > School of Mathematical Sciences
Publisher:CRC Press
Copyright Information:Copyright © 2007 Taylor and Francis
Use License:This item is licensed under a Creative Commons Attribution-NonCommercial-Share Alike 3.0 License. View License
ID Code:537
Deposited On:02 Sep 2008 15:38 by DORAS Administrator. Last Modified 01 Mar 2009 04:02

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