Department of Mathematics
A high-order Markov-switching model for risk measurement
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. © 2009 Elsevier Ltd. All rights reserved.
Higher-order Markov chain process, Portfolio, Regime-switching, Risk management, Value-at-Risk, Weak Markov chain process
Source Publication Title
Computers and Mathematics with Applications
Link to Publisher's Edition
Siu, T. K., W. K. Ching, E. Fung, M. Ng, and X. Li. "A high-order Markov-switching model for risk measurement." Computers and Mathematics with Applications 58.1 (2009): 1-10.