Research Discussion Papers, Bank of Finland
No 20/2007:
Measuring potential market risk
Mikael Bask ()
Abstract: The difference between market risk and potential market
risk is emphasized and a measure of the latter risk is proposed.
Specifically, it is argued that the spectrum of smooth Lyapunov exponents
can be utilized in what we call (l, s2)-analysis, which is a method to
monitor the aforementioned risk measures. The reason is that these
exponents focus on the stability properties (l) of the stochastic dynamic
system generating asset returns, while more traditional risk measures such
as value-at-risk are concerned with the distribution of returns (s2).
Keywords: market risk; potential market risk; smooth Lyapunov exponents; stochastic dynamic system; value-at-risk; (follow links to similar papers)
JEL-Codes: G11; (follow links to similar papers)
18 pages, November 13, 2007
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