Behavioral approach to market and default risks modeling

Taguedong, Sylvain Chamberlain (2009): Behavioral approach to market and default risks modeling. Published in: Chicago Booth School of Business Finance Research Papers (27 December 2009)

Abstract

In this paper we discuss popular market and default risks modeling. We highlight some shortcomings. Then, we present the prospect and cumulative prospect theories. We discuss again the previous models under behavioral finance framework and get different results. Based on these results, we propose a new Value at Risk measure and make suggestions on other measures.

• Item Type: MPRA Paper
• Language: English
• Keywords: Noise Trading; Value at Risk; Probability of Default; Risk Measure Coherence; Risk Measure's Estimator Coherence
• Subjects: G - Financial Economics > G1 - General Financial Markets; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; G - Financial Economics > G0 - General

References

A. Saichev, D. Sornette and V. Filimonov (2009) Most efficient homogenous volatility estimators.

Acerbi, C., Tasche, D. (2001) On the Coherence of Expected Shortfall.

Baker Malcolm and Jeffrey Wurgler (2007) Investor Sentiment in the Stock Market. Journal of Economic Perspectives volume 21 (2), pg. 129-151.

Basel Committee on Banking Supervision (2006) International Convergence of Capital Measurement and Capital Standards.

Benoit B. Mandelbrot; John W. Van Ness (1968) Fractional Brownian motions, fractional noises and applications.

Benoit Mandelbrot, Adlai Fischer and Laurent Calvet (1997) A Multifractal Model of Asset Returns.

Bernoulli Commentaries of the Imperial Academy of Science of Saint Petersburg(1738).

Carlo Acerbi Dirk Tasche (2001) Expected Shortfall: a natural coherent alternative to Value at Risk.

Charles Lee, Andrei Shleifer, and Richard Thaler (1991) Investor Sentiment and the Closed-End Fund Puzzle.

Credit Suisse First Boston International (1997) Creditrisk+TM – Technical Document.

Garman, M. B., and Klass, M. J. (1980) On the estimation of security price volatilities from historical data. Journal of business.

Giovanni Barone-Adesi, Kostas Giannopoulos and Les Vosper (2000) Filtering Historical Simulation. Backtest Analysis.

Haim Levy, Enrico Degiorgi and Thorsten Hens (2003). Prospect theory and the CAPM: A contradiction or coexistence?

J. Bradford De long; Andrei Shleifer; Lawrence H. Summers and Robert J. Waldmann (1987) Noise trader risk in financial markets.

Jean-Philippe Bouchaud and Marc Potters (2000) Theory of financial risks: From Statistical Physics to Risk Management.

John C. Hull (2007) The Credit Crunch of (2007). What Went Wrong? Why? What Lessons Can Be Learned?

Kahneman, D. and A. Tversky(1979) Prospect theory: an analysis of decisions under Risk. Econometrica 47, 263–291.

Keynes, John Maynard (1937) The General Theory. In Quarterly Journal of Economics.

L. J. Savage (1962) Foundation of Statistical Inference.

Moody’s KMV (2007) EDF™ 8.0 Model enhancements.

Parkinson, M. (1980) The extreme value method for estimating the variance of the rate of return. Journal of Business 53:61–65.

Peterson, M. (2004) Transformative Decision Rules, Permutability, and Non-Sequential Framing, Synthese 139, 387–403.

Quiggin, J. (1993) Generalized Expected Utility Theory. The Rank-Dependent Mode.

RiskMetrics Group, Inc (2007) CreditMetrics™—Technical Document.

Robert A. Jarrow and Stuart Turnbull (1995) Pricing Derivatives on Financial Securities Subject to credit risk. Journal of Finance, vol. 50.

Robert Geske, Walter Torous (1987) Volatility and Mispricing: Robust Variance Estimation and Black-Scholes Call Option Pricing.

Rogers, L. C. G., and Satchell, S. E. (1991) Estimating variance from high, low and closing prices. Annals of Applied Probability 1:504–12.

Shiller, Robert J. (2000) Measuring Bubble Expectations and Investor Confidence. Stephen Figlewski (1994) Forecasting Volatility Using Historical Data. Journal of Business.

Stephen Figlewski (2004) forecasting volatility

Torben G. Andersen , Tim Bollerslev , Steve Lange. (1999) Forecasting financial market volatility: Sample frequency vis-à-vis forecast horizon.

Tversky, A and Kahneman, D (1992) Advances in Prospect Theory: Cumulative Representation of Uncertainty.

Von Neumann J, Morgenstern O (1944) Theory of games and economic behavior Princeton University Press, Princeton.

Welch, Ivo and Lily Qiu (2004) Investor Sentiment Measures

Wilson Sy (2008) Credit risk models: why they failed in the credit crisis?

Yang, Dennis, and Qiang Zhang, (2000) Drift-independent volatility estimation based on high, low, open, and close prices. Journal of Business 73, 477-491.

Young Ho Eom, Jean Elwege and Jing-Zhi Huang (2004) Structural models of corporate bonds pricing: An empirical analysis.

http://icf.som.yale.edu/confidence.index

https://customers.reuters.com/community/university/default.aspx