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Estimating Financial Risk Measures for Futures Positions:A Non-Parametric Approach

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Listed author(s):
  • John Cotter

    (University College Dublin, Ireland)

  • Kevin Dowd

    (The University of Nottingham)

Abstract

This paper presents non-parametric estimates of spectral risk measures applied to long and short positions in 5 prominent equity futures contracts. It also compares these to estimates of two popular alternative measures, the Value-at-Risk (VaR) and Expected Shortfall (ES). The spectral risk measures are conditioned on the coefficient of absolute risk aversion, and the latter two are conditioned on the confidence level. Our findings indicate that all risk measures increase dramatically and their estimators deteriorate in precision when their respective conditioning parameter increases. Results also suggest that estimates of spectral risk measures and their precision levels are of comparable orders of magnitude as those of more conventional risk measures. Running head: financial risk measures for futures positions.

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Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 200613.

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Length: 27 pages
Date of creation: 24 Jun 2011
Handle: RePEc:ucd:wpaper:2006/13
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  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  1. Brooks, C. & Clare, A.D. & Dalle Molle, J.W. & Persand, G., 2005. "A comparison of extreme value theory approaches for determining value at risk," Journal of Empirical Finance, Elsevier, vol. 12(2), pages 339-352, March.
  2. Acerbi, Carlo, 2002. "Spectral measures of risk: A coherent representation of subjective risk aversion," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1505-1518, July.
  3. Thomas Werner & Christian Upper, 2004. "Time variation in the tail behavior of Bund future returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(4), pages 387-398, 04.
  4. 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.
  5. Cotter, John & Dowd, Kevin, 2006. "Extreme spectral risk measures: An application to futures clearinghouse margin requirements," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3469-3485, December.
  6. Christian Gourieroux & Wei Liu, 2006. "Sensitivity Analysis of Distortion Risk Measures," Working Papers 2006-33, Centre de Recherche en Economie et Statistique.
  7. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
  8. John Cotter, 2004. "Minimum capital requirement calculations for UK futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(2), pages 193-220, 02.
  9. Broussard, John Paul, 2001. "Extreme-value and margin setting with and without price limits," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(3), pages 365-385.
  10. Song Xi Chen, 2005. "Nonparametric Inference of Value-at-Risk for Dependent Financial Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(2), pages 227-255.
  11. Hsieh, David A., 1993. "Implications of Nonlinear Dynamics for Financial Risk Management," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 41-64, March.
  12. Upper, Christian & Werner, Thomas, 2002. "Time Variation in the Tail Behaviour of Bund Futures Returns," Discussion Paper Series 1: Economic Studies 2002,25, Deutsche Bundesbank, Research Centre.
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Cited by:

  1. Wächter, Hans Peter & Mazzoni, Thomas, 2013. "Consistent modeling of risk averse behavior with spectral risk measures," European Journal of Operational Research, Elsevier, vol. 229(2), pages 487-495.
  2. Mario Brandtner, 2016. "Spektrale Risikomaße: Konzeption, betriebswirtschaftliche Anwendungen und Fallstricke," Management Review Quarterly, Springer;Vienna University of Economics and Business, vol. 66(2), pages 75-115, April.
  3. Mario Brandtner, 2016. "“Spectral Risk Measures: Properties and Limitations”: Comment on Dowd, Cotter, and Sorwar," Journal of Financial Services Research, Springer;Western Finance Association, vol. 49(1), pages 121-131, February.
  4. Mitra, Sovan, 2017. "Efficient option risk measurement with reduced model risk," Insurance: Mathematics and Economics, Elsevier, vol. 72(C), pages 163-174.
  5. Brandtner, Mario & Kürsten, Wolfgang, 2015. "Decision making with Expected Shortfall and spectral risk measures: The problem of comparative risk aversion," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 268-280.

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