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The Mean Reversion Stochastic Processes Applications in Risk Management

Radkov, Petar (2010): The Mean Reversion Stochastic Processes Applications in Risk Management.

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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.

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