A Higher-order Markov-switching model for risk measurement

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Title: A Higher-order Markov-switching model for risk measurement
Related: Computers and mathematics with applications, Vol. 58, Issue 1, (2009), p.1-10
DOI: 10.1016/j.camwa.2008.10.099
Publisher: Elsevier
Date: 2009
Author/Creator: Siu, T. K
Author/Creator: Ching, W. K
Author/Creator: Fung, E
Author/Creator: Ng, M
Author/Creator: Li, X
Description: In this paper, we introduce a High-order Markov-Switching (HMS) model for measuring the risk of a portfolio. We suppose that the rate of return from a risky portfolio follows an HMS model with the drift and the volatility modulated by a discrete-time weak Markov chain. The states of the weak Markov chain are interpreted as observable states of an economy. We adopt the Value-at-Risk (VaR) as a metric for market risk quantification and examine the high-order effect of the underlying Markov chain on the risk measures via backtesting.
Description: 10 page(s)
Subject Keyword: 150200 Banking, Finance and Investment
Subject Keyword: Value-at-Risk
Subject Keyword: Higher-order Markov chain process
Subject Keyword: Portfolio
Subject Keyword: Regime-switching
Subject Keyword: Risk management
Subject Keyword: Weak Markov chain process
Resource Type: journal article
Organisation: Macquarie University. Department of Actuarial Studies

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