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Value at risk for large portfolios
Umeå University, Faculty of Social Sciences, Department of Economics.
Umeå University, Faculty of Social Sciences, Department of Economics.
Umeå University, Faculty of Social Sciences, Department of Economics.
2011 (English)In: Finance Research Letters, ISSN 1544-6123, E-ISSN 1544-6131, Vol. 8, no 2, 18 p.59-68 p.Article in journal (Refereed) Published
Abstract [en]

We argue that the practise used in the valuation of the portfolio is important for the calculation of the Value at Risk. In particular, when liquidating a large portfolio the seller may not face horizontal demand curves. We propose a partially new approach for incorporating this fact in the Value at Risk and in an empirical illustration we compare it to a competing approach. We find substantial differences.

Place, publisher, year, edition, pages
Elsevier, 2011. Vol. 8, no 2, 18 p.59-68 p.
Keyword [en]
Demand, Supply, Liquidity Risk, Limit Order Book, Bank, Sweden
National Category
Economics
Research subject
Econometrics
Identifiers
URN: urn:nbn:se:umu:diva-22199DOI: 10.1016/j.frl.2010.10.002OAI: oai:DiVA.org:umu-22199DiVA: diva2:213645
Distributor:
Institutionen för nationalekonomi, 90187, Umeå
Available from: 2009-04-28 Created: 2009-04-27 Last updated: 2017-12-13Bibliographically approved
In thesis
1. On Risk Prediction
Open this publication in new window or tab >>On Risk Prediction
2009 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This thesis comprises four papers concerning risk prediction.

Paper [I] suggests a nonlinear and multivariate time series model

framework that enables the study of simultaneity in returns and in

volatilities, as well as asymmetric effects arising from shocks. Using

daily data 2000-2006 for the Baltic state stock exchanges and that of

Moscow we find recursive structures with Riga directly depending in

returns on Tallinn and Vilnius, and Tallinn on Vilnius. For volatilities

both Riga and Vilnius depend on Tallinn. In addition, we find evidence

of asymmetric effects of shocks arising in Moscow and in the Baltic states

on both returns and volatilities.

Paper [II] argues that the estimation error in Value at Risk predictors

gives rise to underestimation of portfolio risk. A simple correction is

proposed and in an empirical illustration it is found to be economically

relevant.

Paper [III] studies some approximation approaches to computing the

Value at Risk and the Expected Shortfall for multiple period asset re-

turns. Based on the result of a simulation experiment we conclude that

among the approaches studied the one based on assuming a skewed t dis-

tribution for the multiple period returns and that based on simulations

were the best. We also found that the uncertainty due to the estimation

error can be quite accurately estimated employing the delta method. In

an empirical illustration we computed five day Value at Risk's for the

S&P 500 index. The approaches performed about equally well.

Paper [IV] argues that the practise used in the valuation of the port-

folio is important for the calculation of the Value at Risk. In particular,

when liquidating a large portfolio the seller may not face horizontal de-

mandcurves. We propose a partially new approach for incorporating

this fact in the Value at Risk and in an empirical illustration we compare

it to a competing approach. We find substantial differences.

Place, publisher, year, edition, pages
Umeå: Umeå universitet, 2009
Series
Umeå economic studies, ISSN 0348-1018 ; 770
Keyword
Finance, Time series, GARCH, Estimation error, Asymmetry, Supply and demand
National Category
Economics
Research subject
Econometrics
Identifiers
urn:nbn:se:umu:diva-22200 (URN)
Public defence
2009-05-20, S312, Samhällsvetarhuset , Umeå Universitet, Umeå, 10:15 (English)
Opponent
Supervisors
Available from: 2009-04-29 Created: 2009-04-27 Last updated: 2009-04-29Bibliographically approved
2. Essays on credit markets and banking
Open this publication in new window or tab >>Essays on credit markets and banking
2012 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This thesis consists of four self-contained papers related to banking, credit markets and financial stability.   

Paper [I] presents a credit market model and finds, using an agent based modeling approach, that credit crunches have a tendency to occur; even when credit markets are almost entirely transparent in the absence of external shocks. We find evidence supporting the asset deterioration hypothesis and results that emphasize the importance of accurate firm quality estimates. In addition, we find that an increase in the debt’s time to maturity, homogenous expected default rates and a conservative lending approach, reduces the probability of a credit crunch. Thus, our results suggest some up till now partially overlooked components contributing to the financial stability of an economy.    

Paper [II] derives an econometric disequilibrium model for time series data. This is done by error correcting the supply of some good. The model separates between a continuously clearing market and a clearing market in the long-run such that we are able to obtain a novel test of clearing markets. We apply the model to the Swedish market for short-term business loans, and find that this market is characterized by a long-run nonmarket clearing equilibrium.   

Paper [III] studies the risk-return profile of centralized and decentralized banks. We address the conditions that favor a particular lending regime while acknowledging the effects on lending and returns caused by the course of the business cycle. To analyze these issues, we develop a model which incorporates two stylized facts; (i) banks in which lendingdecisions are decentralized tend to have a lower cost associated with screening potential borrowers and (ii) decentralized decision-making may generate inefficient outcomes because of lack of coordination. Simulations are used to compare the two banking regimes. Among the results, it is found that even though a bank group where decisions are decentralizedmay end up with a portfolio of loans which is (relatively) poorly diversified between regions, the ability to effectively screen potential borrowers may nevertheless give a decentralized bank a lower overall risk in the lending portfolio than when decisions are centralized.   

In Paper [IV], we argue that the practice used in the valuation of a portfolio of assets is important for the calculation of the Value at Risk. In particular, a seller seeking to liquidate a large portfolio may not face horizontal demand curves. We propose a partially new approach for incorporating this fact in the Value at Risk and Expected Shortfall measures and in an empirical illustration, we compare it to a competing approach. We find substantial differences.

Place, publisher, year, edition, pages
Umeå: Umeå University, 2012. 16 p.
Series
Umeå economic studies, ISSN 0348-1018 ; 840
Keyword
financial stability, credit market, banking, agent based model, simulations, disequilibrium, clearing market, business cycle, risk, organization
National Category
Economics
Research subject
Econometrics; Economics
Identifiers
urn:nbn:se:umu:diva-53494 (URN)978-91-7459-384-6 (ISBN)
Public defence
2012-05-04, Samhällsvetarhuset, Hörsal D, Umeå Universitet, Umeå, 10:15 (English)
Opponent
Supervisors
Available from: 2012-03-30 Created: 2012-03-28 Last updated: 2012-05-29Bibliographically approved

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