One of the major problem faced by banks is how to manage the risk exposure in large portfolios. According to Basel II regulation banks has to measure the risk using Value-at-Risk with confidence level 99%. However, this regulation does not specify the way to calculate Valueat- Risk. The easiest way to calculate Value-at-Risk is to assume that portfolio returns are normally distributed. Altough, this is the most common way to calculate Value-at-Risk, there exists also other methods. The previous crisis shows that the regular methods are unfortunately not always enough to prevent bankruptcy. This paper is devoted to compare the classical methods of estimating risk with other methods such as Cornish-Fisher Expansion (CFVaR) and assuming generalized hyperbolic distribution. To be able to do this study, we estimate the risk in a large portfolio consisting of ten stocks. These stocks are chosen from the NASDAQ 100-list in order to have highly liquid stocks (bluechips). The stocks are chosen from different sectors to make the portfolio welldiversified. To investigate the impact of dependence between the stocks in the portfolio we remove the two most correlated stocks and consider the resulting eight stock portfolio as well. In both portfolios we put equal weight to the included stocks. The results show that for a well-diversified large portfolio none of the risk measures are violated. However, for a portfolio consisting of only one highly volatile stock we prove that we have a violation in the classical methods but not when we use the modern methods mentioned above.
| Identifer | oai:union.ndltd.org:UPSALLA1/oai:DiVA.org:hh-16274 |
| Date | January 2011 |
| Creators | Sjöstrand, Maria, Aktaş, Özlem |
| Publisher | Högskolan i Halmstad, Tillämpad matematik och fysik (MPE-lab), Högskolan i Halmstad, Tillämpad matematik och fysik (MPE-lab) |
| Source Sets | DiVA Archive at Upsalla University |
| Language | English |
| Detected Language | English |
| Type | Student thesis, info:eu-repo/semantics/bachelorThesis, text |
| Format | application/pdf |
| Rights | info:eu-repo/semantics/openAccess |
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