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Value at Risk (VaR) and the alpha-stable distribution

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  • John C. Frain

    ()
    (Department of Economics, Trinity College Dublin)

Abstract

Volatility in financial markets is a matter of considerable concern to financial institutions and their supervisors. Already it is clear that this volatility has had an adverse effect on the real economy. Many measures of risk that are used today do not take full account of the kind of extreme changes in asset prices that have been observed. This paper finds that the Value at Risk measure of risk can be improved by the use of an alpha-stable distribution in place of more conventional measures. The paper describes the use of this measure and implements it for six total returns equity portfolios. We find that alpha-stable based measures are feasible and are better than conventional measures. They are a useful tool for the risk manager and the financial regulator.

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File URL: http://www.tcd.ie/Economics/TEP/2008/TEP0308.pdf
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Bibliographic Info

Paper provided by Trinity College Dublin, Department of Economics in its series Trinity Economics Papers with number tep0308.

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Length: 52 pages
Date of creation: May 2008
Date of revision: May 2008
Handle: RePEc:tcd:tcduee:tep0308

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Postal: Trinity College, Dublin 2
Phone: (+ 353 1) 6081325
Fax: 6772503
Web page: http://www.tcd.ie/Economics/
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Keywords: alpha stable distribution; Value at Risk; VaR;

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  1. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
  2. Aleksander Janicki & Aleksander Weron, 1994. "Simulation and Chaotic Behavior of Alpha-stable Stochastic Processes," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook9401.
  3. Con Keating & Hyun Song Shin & Charles Goodhart & Jon Danielsson, 2001. "An Academic Response to Basel II," FMG Special Papers sp130, Financial Markets Group.
  4. Frain, John & Meegan, Conor, 1996. "Market Risk: An introduction to the concept & analytics of Value-at-risk," Research Technical Papers 7/RT/96, Central Bank of Ireland.
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