Evaluating and monitoring financial risk in the presence of economic change and european integration

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Project objective

The main objective is to propose statistical methods for evaluating and monitoring financial risk measures such as volatility and Value at Risk (VaR) in the presence of structural economic change. The Community has experienced many such internal and external structural changes most of which have important socio-economic implications. Financial institutions, regulators and researchers adopt the popular, standard risk management measure being VaR defined as the maximum potential change in the value of a portfolio with a given probability p over a certain horizon. Failing to recognize structural breaks will result in flawed risk management as the distributions used for assessing risk will be misspecified which will lead to misguided asset allocation and policies. This main objective has a threefold nature:(1) VaR methods operate under the assumption of distributional homogeneity - stability . The objective is to identify the historical sample, for major European and non-European financial series, characterized by structural stability necessary for accurate VaR estimates as well as present a continuous inspection scheme for timely detecting disruptions in VaR.(2) The methods proposed aim to identify the timing as well as the effect of structural breaks in international financial asset returns and volatility . This would contribute to the change-point tests for conditional variances and risk-adjusted returns that are relevant to empirical finance and risk managers.(3) The objective is to examine the multivariate structural stability hypothesis that involves the interaction of financial markets and indicators. This facet of the project aims at testing the source and transmission of structural breaks in international financial markets which is particularly useful to policy makers promoting financial stability .

Original text from CORDIS.

Participants

• TILBURG UNIVERSITY · TILBURGCoordinatorNetherlands

Links

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