Title

Modelling Extreme Market Risk - A Study of Tail Related Risk Measures

Date of Award

2011

Degree Type

Thesis

Degree Name

Doctor of Philosophy

School

School of Accounting Finance and Economics

Faculty

Business and Law

First Advisor

Professor David. E. Allen

Second Advisor

Assoc. Professor Robert J Powell

Abstract

Market risk modelling is one of the most dynamic domains in finance. Risk is the uncertainty that affects the values of assets in the system in an unknown fashion causing fluctuations in their values and in investment outcomes. Market risk is defined as the losses due to fluctuations in the prices of financial assets which are caused by changing market conditions. Market risk modelling comprises tools and techniques which quantify the risk associated with financial instruments. Risk quantification is necessary to devise strategies such as hedging or diversification against the risk, to avoid severe losses. With the recent financial market events like the Global Financial Crisis, there is a need to evaluate the traditional risk return relationships presented in Asset Pricing models and more sophisticated risk modelling tools like Value at Risk (VaR). Along with Asset Pricing and VaR modelling another important risk issue between financial assets is the asymptotic tail dependence, which plays a vital role in accurate risk measurement in portfolio selection and hedging amongst other considerations. The usual measure of dependence, the Pearson Correlation coefficient works on the assumption of normality in the data distribution and hence is unable to capture the tail dependence between financial assets which is an important characteristic for tail risk modelling. The research presented in this dissertation models the risk quantification techniques of Asset Pricing, VaR modelling and Tail dependence, with the more sophisticated statistical tools of Quantile Regression and Extreme Value Theory (EVT), which are particularly useful in modelling the tail behaviour of the distributions. The research targets four broad objectives to evaluate extreme risk and dependence measures in the Australian stock market which are realised with the robust techniques of Quantile Regression and EVT. The thesis comprises six chapters with chapter-1 introducing the thesis presenting the driving motivations for the research and the four major objectives (which are detailed in individual chapters following chapter-1) along with the contribution of the research and finally chapter-6 presenting the conclusion. The structure of rest of the thesis is also outlined in chapter-1.

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