Publication Type

Journal Article

Publication Date

11-2015

Abstract

The key contribution in this paper is to provide a new approach in estimating the physical distribution of the underlying asset return by using a quadratic Radon-Nikodym derivative function. The latter function transforms a fitted Variance Gamma risk-neutral distribution that is obtained from traded option prices. The generality of the VG distribution helps to avoid unnecessary mis-specification bias. The estimated empirical distribution is then used to find the risk measure of VaR. We show that possible underestimation of VaR risk using existing methods is largely not due to VaR itself but perhaps due to mis-specification errors which we minimize in our approach. Our method of measuring VaR clearly captures large tail risk in the empirical examples on S&P 500 index.

Keywords

Density Estimation, Value-at-Risk, Forecasting and Prediction

Discipline

Finance and Financial Management | Management Sciences and Quantitative Methods

Research Areas

Finance

Publication

Journal of Mathematical Finance

Volume

5

Issue

5

First Page

423

Last Page

432

ISSN

2162-2434

Identifier

10.4236/jmf.2015.55036

Publisher

Scientific Research Publishing

Additional URL

http://dx.doi.org/10.4236/jmf.2015.55036

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