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Estimating financial risk measures for options

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  • Sorwar, Ghulam
  • Dowd, Kevin

Abstract

This paper proposes a simulation-lattice procedure to estimate financial risk measures for option positions. The framework proposed can be applied to many different kinds of options, including exotic and vanilla options; it can take account of early exercise features; heavy tails in underlying processes; estimate different risk measures, including VaR, Expected Shortfall and Spectral Risk Measures; and in a limited way it can be generalized to accommodate multiple-factors. It avoids many of the limitations of existing approaches and, in particular, avoids the problems associated approaches based on delta-gamma and similar approximations. It also generates some interesting results about the risk measures of some illustrative options positions.

Suggested Citation

  • Sorwar, Ghulam & Dowd, Kevin, 2010. "Estimating financial risk measures for options," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1982-1992, August.
    • Handle: RePEc:eee:jbfina:v:34:y:2010:i:8:p:1982-1992
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    References listed on IDEAS

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    Cited by:

    1. Shin Kim, Young & Rachev, Svetlozar T. & Leonardo Bianchi, Michele & Fabozzi, Frank J., 2010. "Tempered stable and tempered infinitely divisible GARCH models," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2096-2109, September.
    2. Lima Miquelluti, Daniel & Ozaki, Vitor & Miquelluti, David J., 2020. "An application of geographically weighted quantile LASSO to weather index insurance design," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304288, Agricultural and Applied Economics Association.
    3. Mitra, Sovan, 2017. "Efficient option risk measurement with reduced model risk," Insurance: Mathematics and Economics, Elsevier, vol. 72(C), pages 163-174.
    4. Kim, Young Shin & Rachev, Svetlozar T. & Bianchi, Michele Leonardo & Mitov, Ivan & Fabozzi, Frank J., 2011. "Time series analysis for financial market meltdowns," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1879-1891, August.
    5. Daniel Lima Miquelluti & Vitor Augusto Ozaki & David José Miquelluti, 2022. "An Application of Geographically Weighted Quantile Lasso to Weather Index Insurance Design," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 26(3), pages 200387-2003.
    6. Mozumder, Sharif & Choudhry, Taufiq & Dempsey, Michael, 2018. "Spectral measures of risk for international futures markets: A comparison of extreme value and Lévy models," Global Finance Journal, Elsevier, vol. 37(C), pages 248-261.
    7. Chen, Rongda & Yu, Lean, 2013. "A novel nonlinear value-at-risk method for modeling risk of option portfolio with multivariate mixture of normal distributions," Economic Modelling, Elsevier, vol. 35(C), pages 796-804.
    8. Massimiliano Barbi & Silvia Romagnoli, 2016. "Optimal hedge ratio under a subjective re-weighting of the original measure," Applied Economics, Taylor & Francis Journals, vol. 48(14), pages 1271-1280, March.

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