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Beyond VaR and CVaR: Topological Risk Measures in Financial Markets

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  • Amit Kumar Jha

Abstract

This paper introduces a novel approach to financial risk assessment by incorporating topological data analysis (TDA), specifically cohomology groups, into the evaluation of equities portfolios. The study aims to go beyond traditional risk measures like Value at Risk (VaR) and Conditional Value at Risk (CVaR), offering a more nuanced understanding of market complexities. Using last one year daily real-world closing price return data for three equities Apple, Microsoft and Google , we developed a new topological riskmeasure, termed Topological VaR Distance (TVaRD). Preliminary results indicate a significant change in the density of the point cloud representing the financial time series during stress conditions, suggesting that TVaRD may offer additional insights into portfolio risk and has the potential to complement existing risk management tools.

Suggested Citation

  • Amit Kumar Jha, 2023. "Beyond VaR and CVaR: Topological Risk Measures in Financial Markets," Papers 2310.14604, arXiv.org, revised Oct 2023.
    • Handle: RePEc:arx:papers:2310.14604
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    1. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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