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., Ching, W., Fung, E., Ng, M., & Li, X. (2009). A high-order Markov-switching model for risk measurement. Computers and Mathematics with Applications, 58 (1), 1-10. https://doi.org/10.1016/j.camwa.2008.10.099