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 | |
| 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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