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An Integrated Risk Management Method: VaR Approach

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  • Hailiang Yang

    (The University of Hong Kong, Hong Kong)

Abstract

This article presents a simple methodology for computing Value at Risk (VaR) for a portfolio of financial instruments that is sensitive to market risk, rating change, and default risk. An integrated model for market and credit risks is developed. The Jarrow, Lando and Turnbull model (the Markov chain model) is used to represent the dynamics of the credit rating. Procedures for calculating VaR are presented. Numerical illustration results are included.

Suggested Citation

  • Hailiang Yang, 2000. "An Integrated Risk Management Method: VaR Approach," Multinational Finance Journal, Multinational Finance Journal, vol. 4(3-4), pages 201-219, September.
    • Handle: RePEc:mfj:journl:v:4:y:2000:i:3-4:p:201-219
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    References listed on IDEAS

    as
    1. Robert A. Jarrow & David Lando & Stuart M. Turnbull, 2008. "A Markov Model for the Term Structure of Credit Risk Spreads," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 18, pages 411-453, World Scientific Publishing Co. Pte. Ltd..
    2. Gerber, Hans U. & Goovaerts, Marc J. & Kaas, Rob, 1987. "On the Probability and Severity of Ruin," ASTIN Bulletin, Cambridge University Press, vol. 17(2), pages 151-163, November.
    3. De Vylder, F. & Goovaerts, M. J., 1988. "Recursive calculation of finite-time ruin probabilities," Insurance: Mathematics and Economics, Elsevier, vol. 7(1), pages 1-7, January.
    4. Subu Venkataraman, 1997. "Value at risk for a mixture of normal distributions: the use of quasi- Bayesian estimation techniques," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 21(Mar), pages 2-13.
    5. Gerber, Hans U. & Shiu, Elias S. W., 1997. "The joint distribution of the time of ruin, the surplus immediately before ruin, and the deficit at ruin," Insurance: Mathematics and Economics, Elsevier, vol. 21(2), pages 129-137, November.
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    Citations

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    Cited by:

    1. Yin-Wong Cheung, 2000. "Special Issue on Asset Price Dynamics and Risk Management," Multinational Finance Journal, Multinational Finance Journal, vol. 4(3-4), pages 155-157, September.
    2. T. Ermolieva & T. Filatova & Y. Ermoliev & M. Obersteiner & K. M. de Bruijn & A. Jeuken, 2017. "Flood Catastrophe Model for Designing Optimal Flood Insurance Program: Estimating Location‐Specific Premiums in the Netherlands," Risk Analysis, John Wiley & Sons, vol. 37(1), pages 82-98, January.

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    More about this item

    Keywords

    credit rating; default risk; integrated risk management; Markov chain; value at risk;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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