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Measuring potential market risk

  • Bask, Mikael

We argue herein that there is a fundamental and an important difference between the market risk and the potential market risk in financial markets. We also argue that the spectrum of smooth Lyapunov exponents can be used in ([lambda],[sigma]2)-analysis, which is a method to measure and monitor these risks. The reason is that these exponents focus on the stability properties ([lambda]) of the stochastic dynamic system generating asset returns, while more traditional risk measures such as value-at-risk are concerned with the distribution of asset returns ([sigma]2).

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Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 6 (2010)
Issue (Month): 3 (September)
Pages: 180-186

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Handle: RePEc:eee:finsta:v:6:y:2010:i:3:p:180-186
Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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  1. Bask, Mikael & Liu, Tung & Widerberg, Anna, 2007. "The stability of electricity prices: Estimation and inference of the Lyapunov exponents," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 376(C), pages 565-572.
  2. Potter, Simon M., 2000. "Nonlinear impulse response functions," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1425-1446, September.
  3. Bask, Mikael & Widerberg, Anna, 2007. "The Stability and Volatility of Electricity Prices: An Illustration of (lambda, sigma-2) Analysis," Working Papers in Economics 267, University of Gothenburg, Department of Economics.
  4. Mototsugu Shintani, 2006. "A nonparametric measure of convergence towards purchasing power parity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(5), pages 589-604.
  5. Oliver Linton & Mototsugu Shintani, 2002. "Nonparametric Neutral Network Estimation of Lyapunov Exponents and a Direct Test for Chaos," STICERD - Econometrics Paper Series /2002/434, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  6. Simón Sosvilla-Rivero & Fernando Fernández-Rodriguez & Julián Andrada-Félix, 2005. "Testing chaotic dynamics via Lyapunov exponents," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 911-930.
  7. Bask, Mikael & de Luna, Xavier, 2001. "Characterizing the degree of stability of non-linear dynamic models," Umeå Economic Studies 564, Umeå University, Department of Economics.
  8. Mototsugu Shintani & Oliver Linton, 2003. "Nonparametric neural network estimation of Lyapunov exponents and a direct test for chaos," LSE Research Online Documents on Economics 2097, London School of Economics and Political Science, LSE Library.
  9. Xavier De Luna, 1998. "Projected polynomial autoregression for prediction of stationary time series," Journal of Applied Statistics, Taylor & Francis Journals, vol. 25(6), pages 763-775.
  10. Dechert, W D & Gencay, R, 1992. "Lyapunov Exponents as a Nonparametric Diagnostic for Stability Analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S41-60, Suppl. De.
  11. Bask, Mikael & Widerberg, Anna, 2008. "Market Structure and the Stability and Volatility of Electricity Prices," Working Papers in Economics 327, University of Gothenburg, Department of Economics.
  12. Gencay Ramazan & Dechert W. Davis, 1996. "The Identification of Spurious Lyapunov Exponents in Jacobian Algorithms," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 1(3), pages 1-12, October.
  13. Leeves, Gareth, 2007. "Asymmetric volatility of stock returns during the Asian crisis: Evidence from Indonesia," International Review of Economics & Finance, Elsevier, vol. 16(2), pages 272-286.
  14. Bask, Mikael & de Luna, Xavier, 2001. "EMU and the Stability and Volatility of Foreign Exchange: Some Empirical Evidence," Umeå Economic Studies 565, Umeå University, Department of Economics.
  15. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  16. Oliver Linton & Mototsugu Shintani, 2003. "Nonparametric Neural Network Estimation of Lyapunov Exponents and a Direct Test for Chaos," STICERD - Econometrics Paper Series /2003/455, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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