Heavy Tails and Market Risk Measures: the Case of Czech Stock Market
|Author:||Mgr. Radek Bulva|
|Year:||2010 - summer|
|Leaders:|| PhDr. Jan Zápal Ph.D.
|Work type:|| Finance, Financial Markets and Banking
|Awards and prizes:||M.A. with distinction from the Dean of the Faculty of Social Sciences for an excellent state-final examination performance and for an extraordinarily good masters diploma thesis.|
|Abstract:||One of the stylized facts about the behaviour of financial returns is that they tend to exhibit more probability mass in the tails of the distribution than would be suggested by the normal distribution. This phenomenon is called heavy tails. The first part of this thesis focuses on examining the tails of a distribution of returns to Czech stock market index PX. Parametric and semi-parametric approaches to estimation of the tail index, a measure of heaviness of tails, are applied and compared. The results indicate that the tails behave in a way one would expect from emerging market stock index.
In the second part of the thesis, we introduce two simple measures of market risk, Value at Risk and Expected Shortfall, and compare traditional methods of their estimation with methods adjusted for presence of heavy tails. We conclude that reliance on the normal distribution in modelling the returns can lead to serious underestimation of risks inherent in the underlying process.
|Downloadable:|| Diploma Thesis Bulva