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
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.