A high-order Markov-switching model for risk measurement

T. K. Siu; W. K. Ching; E. Fung; M. Ng; Xun Li

doi:10.1016/j.camwa.2008.10.099

A high-order Markov-switching model for risk measurement

T. K. Siu, W. K. Ching, E. Fung, M. Ng, Xun Li

Research output: Journal article publication › Journal article › Academic research › peer-review

18 Citations (Scopus)

Abstract

In this paper, we introduce a High-order Markov-Switching (HMS) model for measuring the risk of a portfolio. We suppose that the rate of return from a risky portfolio follows an HMS model with the drift and the volatility modulated by a discrete-time weak Markov chain. The states of the weak Markov chain are interpreted as observable states of an economy. We adopt the Value-at-Risk (VaR) as a metric for market risk quantification and examine the high-order effect of the underlying Markov chain on the risk measures via backtesting.

Original language	English
Pages (from-to)	1-10
Number of pages	10
Journal	Computers and Mathematics with Applications
Volume	58
Issue number	1
DOIs	https://doi.org/10.1016/j.camwa.2008.10.099
Publication status	Published - 1 Jul 2009

Keywords

Higher-order Markov chain process
Portfolio
Regime-switching
Risk management
Value-at-Risk
Weak Markov chain process

ASJC Scopus subject areas

Modelling and Simulation
Computational Theory and Mathematics
Computational Mathematics

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10.1016/j.camwa.2008.10.099

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AU - Li, Xun

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AB - In this paper, we introduce a High-order Markov-Switching (HMS) model for measuring the risk of a portfolio. We suppose that the rate of return from a risky portfolio follows an HMS model with the drift and the volatility modulated by a discrete-time weak Markov chain. The states of the weak Markov chain are interpreted as observable states of an economy. We adopt the Value-at-Risk (VaR) as a metric for market risk quantification and examine the high-order effect of the underlying Markov chain on the risk measures via backtesting.

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A high-order Markov-switching model for risk measurement

Abstract

Keywords

ASJC Scopus subject areas

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