Document Type

Journal Article

Department/Unit

Department of Mathematics

Title

A high-order Markov-switching model for risk measurement

Language

English

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. © 2009 Elsevier Ltd. All rights reserved.

Keywords

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

Publication Date

2009

Source Publication Title

Computers and Mathematics with Applications

Volume

58

Issue

1

Start Page

1

End Page

10

Publisher

Elsevier

DOI

10.1016/j.camwa.2008.10.099

Link to Publisher's Edition

http://dx.doi.org/10.1016/j.camwa.2008.10.099

ISSN (print)

08981221

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