The Performance of Market Risk Measures on High and Low Risk Portfolios in the Norwegian and European Markets.
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.
ntnudaim:8037, MTFYMA fysikk og matematikk, Industriell matematikk
IdentifiersURN: urn:nbn:no:ntnu:diva-19084Local ID: ntnudaim:8037OAI: oai:DiVA.org:ntnu-19084DiVA: diva2:566460
Laading, Jacob, Førsteamanuensis II