A Quantitative Risk Management Tool for the Equity Market in Philippines

Abstract

The Philippine stock market is now the most expensive stock market in the Southeast Asia region. As of July 10, 2017, the total market capitalization is about 101 percent of the gross domestic product (GDP). Normally, the ratio between 75 percent and 90 percent is considered fairly valued. Thus, a risk management tool, which can quantitatively estimate the potential odds of a financial crisis, would be particularly useful for market participants. In this paper, we showed the Skewed t distribution could provide best goodness-of-fit for the Philippine stock market returns compared with several other widely used statistical distributions. The scenarios generated by the Skewed t distribution would be valuable for further risk analysis of the stock market.