Volatility Forecast by Volatility Index and Its Use as a Risk Management Tool Under a Value-at-Risk Approach

2018 ◽  
Vol 21 (02) ◽  
pp. 1850010 ◽  
Author(s):  
Yam Wing Siu
Keyword(s):  
At Risk ◽  
Risk Management ◽  
Risk Premium ◽  
Value At Risk ◽  
Realized Volatility ◽  
Management Tool ◽  
Spot Price ◽  
Pricing Options ◽  
Significance Levels ◽  
Risk Approach

This paper examines the predicting power of the volatility indexes of VIX and VHSI on the future volatilities (or called realized volatility, [Formula: see text] of their respective underlying indexes of S&P500 Index, SPX and Hang Seng Index, HSI. It is found that volatilities indexes of VIX and VHSI, on average, are numerically greater than the realized volatilities of SPX and HSI, respectively. Further analysis indicates that realized volatility, if used for pricing options, would, on some occasions, result in greatest losses of 2.21% and 1.91% of the spot price of SPX and HSI, respectively while the greatest profits are 2.56% and 2.93% of the spot price of SPX and HSI, respectively, making it not an ideal benchmark for validating volatility forecasting techniques in relation to option pricing. Hence, a new benchmark (fair volatility, [Formula: see text] that considers the premium of option and the cost of dynamic hedging the position is proposed accordingly. It reveals that, on average, options priced by volatility indexes contain a risk premium demanded by the option sellers. However, the options could, on some occasions, result in greatest losses of 4.85% and 3.60% of the spot price of SPX and HSI, respectively while the greatest profits are 4.60% and 5.49% of the spot price of SPX and HSI, respectively. Nevertheless, it can still be a valuable tool for risk management. [Formula: see text]-values of various significance levels for value-at-risk and conditional value-at-value have been statistically determined for US, Hong Kong, Australia, India, Japan and Korea markets.

scholarly journals Comparative analysis between global sukuk and bond indices: value-at-risk approach

2020 ◽  
Vol 11 (6) ◽  
pp. 1245-1256
Author(s):  
Rubaiyat Ahsan Bhuiyan ◽  
Maya Puspa ◽  
Buerhan Saiti ◽  
Gairuzazmi Mat Ghani
Keyword(s):  
At Risk ◽  
Value At Risk ◽  
Emerging Market ◽  
Management Tool ◽  
Bond Markets ◽  
Investment Portfolio ◽  
Financial Contracts ◽  
Content Type ◽  
Risk Approach ◽  
Bond Indices

Purpose Sukuk is an innovative financial instrument with a flexible structure based on Islamic financial contracts, unlike a bond which is based on the structure of a loan imposed with interest. With the notion that sukuk differs considerably from the conventional bonds in terms of risks related to investment, this study aims to examine whether the sukuk market is different from conventional bond markets based on the value-at-risk (VaR) approach. Design/methodology/approach The VaR of a portfolio consists of sukuk and bond indices and is undertaken to determine whether there is any reduction in the VaR amount through the inclusion of the sukuk index in the portfolio. The analysis is undertaken based on the developed and emerging market bond and sukuk indices from January 2010 to December 2015. Findings This paper examines whether the VaR of sukuk market differs from conventional bond markets by using fundamental techniques. It was observed that the VaR amount of sukuk indices is comparatively much lower than the VaR of bond indices in all the cases. Including the sukuk index with each bond index can reduce the VaR of the portfolio by around 30 to 50 per cent for all the developed and emerging market bond indices. Research limitations/implications This research is limited to covering six years of data. Nonetheless, it is able to provide findings which are believed to be useful for the market players. Practical implications This study unveils attractive opportunities in terms of diversification benefits of sukuk indices for international fixed-income portfolios. Originality/value The VaR method is a useful risk management tool. This study uses this method to emphasise the significant reduction of risks and diversification benefits that sukuk investment could offer by including it in the investment portfolio.

scholarly journals Comparison of Electricity Spot Price Modelling and Risk Management Applications

Energies ◽  
2020 ◽  
Vol 13 (18) ◽  
pp. 4698
Author(s):  
Ethem Çanakoğlu ◽  
Esra Adıyeke
Keyword(s):  
Risk Management ◽  
Regime Switching ◽  
Value At Risk ◽  
Optimization Problems ◽  
Management Tool ◽  
Conditional Value At Risk ◽  
Spot Price ◽  
Hedging Strategies ◽  
Regime Switching Models ◽  
Switching Models

In dealing with sharp changes in electricity prices, contract planning is considered as a vital risk management tool for stakeholders in deregulated power markets. In this paper, dynamics of spot prices in Turkish electricity market are analyzed, and predictive performance of several models are compared, i.e., time series models and regime-switching models. Different models for derivative pricing are proposed, and alternative portfolio optimization problems using mean-variance optimization and conditional value at risk (CVaR) are solved. Expected payoff and risk structure for different hedging strategies for a hypothetical electricity company with a given demand are analyzed. Experimental studies show that regime-switching models are able to capture electricity characteristics better than their standard counterparts. In addition, evaluations with various risk management models demonstrate that those models are highly competent in providing an effective risk control practice for electricity markets.

scholarly journals THE ESTIMATION AND DECOMPOSITION OF VALUE-AT-RISK FOR NON-NORMAL PORTFOLIO RETURNS

2013 ◽  
Vol 14 (Supplement_1) ◽  
pp. S213-S226
Author(s):  
Doowoo Nam
Keyword(s):  
At Risk ◽  
Risk Management ◽  
Analytical Methods ◽  
Value At Risk ◽  
Decomposition Analysis ◽  
Market Risk ◽  
Management Tool ◽  
Portfolio Returns ◽  
Var Decomposition ◽  
The Individual

Value-at-risk (VaR) is a widely used measure for evaluating the market risk of a trading portfolio. This article presents the g-and-h method for estimating the VaR of a portfolio with non-normal returns, and adds to the usefulness of VaR as a risk management tool by decomposing the portfolio into individual VaRs to estimate the contribution of the individual components toward the overall VaR. While the VaR decomposition is algebraically simple under the assumption of normality, that is not the case under non-normality which is the property exhibited by most financial returns. We show that, by using the g-and-h VaR method, the decomposition analysis under non-normality can be performed with the same degree of intuitiveness and ease as for the analytical methods based on the assumption of normality.

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