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Reducing Variation of Risk Estimation by Using Importance Sampling

Author

Listed:
  • Hatem Çoban
  • İpek Deveci Kocakoç
  • Şemsettin Erken
  • Mehmet Akif Aksoy

Abstract

In today's world, risk measurement and risk management are of great importance for various economic reasons. Especially in the crisis periods, the tail risk becomes very important in risk estimation. Many methods have been developed for accurate measurement of risk. The easiest of these methods is the Value at Risk (VaR) method. However, standard VaR methods are not very effective in tail risks. This study aims to demonstrate the usage of delta normal method, historical simulation method, Monte Carlo simulation, and importance sampling to calculate the value at risk and to show which method is more effective by applying them to the S&P index between 1993 and 2003.

Suggested Citation

  • Hatem Çoban & İpek Deveci Kocakoç & Şemsettin Erken & Mehmet Akif Aksoy, 2019. "Reducing Variation of Risk Estimation by Using Importance Sampling," Alphanumeric Journal, Bahadir Fatih Yildirim, vol. 7(2), pages 173-184, December.
    • Handle: RePEc:anm:alpnmr:v:7:y:2019:i:2:p:173-184
    DOI: http://dx.doi.org/10.17093/alphanumeric.605584
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    References listed on IDEAS

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    1. H. Kahn & A. W. Marshall, 1953. "Methods of Reducing Sample Size in Monte Carlo Computations," Operations Research, INFORMS, vol. 1(5), pages 263-278, November.
    2. Paul Glasserman & Jingyi Li, 2005. "Importance Sampling for Portfolio Credit Risk," Management Science, INFORMS, vol. 51(11), pages 1643-1656, November.
    3. Gupta, Jairaj & Chaudhry, Sajid, 2019. "Mind the tail, or risk to fail," Journal of Business Research, Elsevier, vol. 99(C), pages 167-185.
    4. Tim J. Brereton & Dirk P. Kroese & Joshua C. Chan, 2012. "Monte Carlo Methods for Portfolio Credit Risk," ANU Working Papers in Economics and Econometrics 2012-579, Australian National University, College of Business and Economics, School of Economics.
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    More about this item

    Keywords

    Delta Normal Method; Importance Sampling; Monte Carlo Simulation; Tail Risk; Value at Risk;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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