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The Mean Reversion Stochastic Processes Applications in Risk Management

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  • Radkov, Petar

Abstract

In this study we investigate using the mean reversion processes in financial risk management, as they provide an good description of stock price uctuations and market risks. This paper does not aim at being exhaustive, but gives examples for practically implementable models allowing for stylised features in the data. After introducing several widely used the mean reversion processes, we discuss this methods for risk management with Monte Carlo simulations. We also explain how the process can be calibrated based on historical data of Bulgarian 5 year Credit Default Swap and to find out Value at Risk.

Suggested Citation

  • Radkov, Petar, 2010. "The Mean Reversion Stochastic Processes Applications in Risk Management," MPRA Paper 60159, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:60159
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    References listed on IDEAS

    as
    1. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    2. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
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    More about this item

    Keywords

    Risk Management; Stochastic Processes; Mean Reversion; Monte Carlo Simulation; Calibration interest rate processes;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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