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The Performance of Market Risk Measures on High and Low Risk Portfolios in the Norwegian and European Markets.
Norwegian University of Science and Technology, Faculty of Information Technology, Mathematics and Electrical Engineering, Department of Mathematical Sciences.
2012 (English)MasteroppgaveStudent thesis
Abstract [en]

A basic overview of mathematical finance and pricing theory is given. The Black- Scholes model and the LIBOR Market Model are explained, and their assumptions are discussed and tested on historical data. The normality of log-returns of stocks and forward rates is tested for different time periods, and is found to be varying greatly over time. The models are calibrated using the Exponentially Weighted Moving Average (EWMA) method and implemented to perform a backtest against historical data of two risk measures, Value at Risk and Expected Shortfall. The backtesting is done on five portfolios of varying risk, in the European and Norwegian markets. Three unleveraged portfolios consisting of bonds and stocks in different proportions, and two leveraged portfolios consisting of stocks and interest rate caps respectively are considered. The performance of the risk measures is found to be not satisfactory for all portfolios, but performance is better for riskier portfolios and assets. Variation of performance over different time periods is found. The periods of worst performance are those of turbulent market conditions, notably in late 2008. These periods are found to loosely correspond to the time periods in which log-returns of equity and forward rates are least normal. A sensitivity analysis of performances to the weighting parameter in the EWMA is done. The sensitivity is found to be substantial for all portfolios except for the portfolios holding stocks in the Norwegian market.

Place, publisher, year, edition, pages
Institutt for matematiske fag , 2012. , 67 p.
Keyword [no]
ntnudaim:8037, MTFYMA fysikk og matematikk, Industriell matematikk
URN: urn:nbn:no:ntnu:diva-19084Local ID: ntnudaim:8037OAI: diva2:566460
Available from: 2012-11-08 Created: 2012-11-08

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