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Risk Management in Trading and Investment Portfolios

Author

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  • Mazin A.M. Al Janabi

Abstract

The aim of this article is to bridge the gap in equity trading risk management literatures and particularly from the perspective of emerging and illiquid markets, such as in the context of the Gulf Cooperation Council (GCC) financial markets. In this article, we demonstrate a practical approach for the measurement and control of market risk exposure for financial trading portfolios that contain several illiquid equity securities during the unwinding (close-out) period. This approach is based on the renowned concept of Value-at-Risk (VaR) along with the development of an optimisation risk algorithm utilising matrix-algebra technique. Our thorough asset market risk modelling-algorithm can simultaneously handle VaR analysis under normal and severe market conditions, besides it takes into account the effects of illiquidity and short-sales of traded equity securities. In order to illustrate the proper use of VaR and stress-testing methods, real-world structured modelling techniques of trading risk management are presented for the GCC financial markets. To this end, comprehensive simulation case studies are accomplished with the objective of constructing a realistic framework for trading risk measurement and control in addition to the instigation of a risk optimisation algorithm-process for the computation of maximum authorised VaR risk-budgeting limits. JEL Classification : C10, C13, G20, G28

Suggested Citation

  • Mazin A.M. Al Janabi, 2012. "Risk Management in Trading and Investment Portfolios," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 11(2), pages 189-229, August.
    • Handle: RePEc:sae:emffin:v:11:y:2012:i:2:p:189-229
    DOI: 10.1177/0972652712454516
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    References listed on IDEAS

    as
    1. Matthew Pritsker, 1997. "Evaluating Value at Risk Methodologies: Accuracy versus Computational Time," Journal of Financial Services Research, Springer;Western Finance Association, vol. 12(2), pages 201-242, October.
    2. Robert Engle, 2001. "GARCH 101: The Use of ARCH/GARCH Models in Applied Econometrics," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 157-168, Fall.
    3. René Garcia & Éric Renault & Georges Tsafack, 2007. "Proper Conditioning for Coherent VaR in Portfolio Management," Management Science, INFORMS, vol. 53(3), pages 483-494, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Economic capital; emerging markets; financial engineering; financial risk management; GCC financial markets; portfolio management; stress testing; value-at-risk;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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