In this paper, we study risk from the perspective of peak-to-valley market drawdowns. The objective is to gain empirical insights into the drawdown behavior of various asset classes during several time intervals. While the existing literature on drawdown distributions has primarily focused on local drawdowns or consecutive daily drops in various asset classes, this paper focuses on extreme (cumulative) losses occurring over a daily, biweekly, monthly, quarterly and yearly period. The typical investor is mainly concerned with significant negative downward movements, especially when several of these movements happen within a specific time frame. The drawdown measure studied herein embodies this path-dependent risk better than a typical daily standard deviation or value-at-risk estimate due to its cumulative and path-dependent nature. The drawdowns over different periods are analyzed for 25 assets linked to equity indexes, commodities and foreign exchange rates. The tail observations of these drawdowns are fitted to the power law (Pareto distribution) and the stretched exponential (Weibull distribution).We find that the bulk of these observations are well fitted by both distributions. In addition, our analysis shows that the most extreme observations tend to fall between the Weibull and Pareto fits, suggesting that these can be used to define a lower and upper boundary for modeling future drawdowns.
{"title":"Peak-to-valley drawdowns: insights into extreme path-dependent market risk","authors":"Hans Geboers, Benoit Depaire, Stefan Staetmans","doi":"10.21314/jor.2023.012","DOIUrl":"https://doi.org/10.21314/jor.2023.012","url":null,"abstract":"In this paper, we study risk from the perspective of peak-to-valley market drawdowns. The objective is to gain empirical insights into the drawdown behavior of various asset classes during several time intervals. While the existing literature on drawdown distributions has primarily focused on local drawdowns or consecutive daily drops in various asset classes, this paper focuses on extreme (cumulative) losses occurring over a daily, biweekly, monthly, quarterly and yearly period. The typical investor is mainly concerned with significant negative downward movements, especially when several of these movements happen within a specific time frame. The drawdown measure studied herein embodies this path-dependent risk better than a typical daily standard deviation or value-at-risk estimate due to its cumulative and path-dependent nature. The drawdowns over different periods are analyzed for 25 assets linked to equity indexes, commodities and foreign exchange rates. The tail observations of these drawdowns are fitted to the power law (Pareto distribution) and the stretched exponential (Weibull distribution).We find that the bulk of these observations are well fitted by both distributions. In addition, our analysis shows that the most extreme observations tend to fall between the Weibull and Pareto fits, suggesting that these can be used to define a lower and upper boundary for modeling future drawdowns.","PeriodicalId":46697,"journal":{"name":"Journal of Risk","volume":"12 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135662608","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper introduces quantile models that incorporate realized variance, realized semivariance, jump variation and jump semivariation based on a conditional autoregressive quantile regression model framework for improved value-at-risk (VaR) and improved joint forecasts of VaR and expected shortfall (ES), which we denote by .VaR; ES/. Our empirical results show that high-frequency-data-based realized quantities lead to better VaR and .VaR; ES/ forecasts. We evaluate these using conditional coverage and dynamic quantile backtests for VaR, regression-based backtests for .VaR; ES/ and comparison tests based on scoring functions and model confidence sets. The study includes data sets covering the global financial crisis of 2007–9 and the Covid-19 pandemic to ensure stability over different market conditions. The results indicate that realized quantity extensions improve forecasts in terms of classic and comparison tests for all quantile levels and time periods, with stand-alone VaR forecasts benefiting the most. It is shown that the symmetric absolute value quantile model benefits the most from realized semivariance extension, whereas the asymmetric slope model benefits the most from realized variance extension.
{"title":"Realized quantity extended conditional autoregressive value-at-risk models","authors":"Pit Götz","doi":"10.21314/jor.2023.010","DOIUrl":"https://doi.org/10.21314/jor.2023.010","url":null,"abstract":"This paper introduces quantile models that incorporate realized variance, realized semivariance, jump variation and jump semivariation based on a conditional autoregressive quantile regression model framework for improved value-at-risk (VaR) and improved joint forecasts of VaR and expected shortfall (ES), which we denote by .VaR; ES/. Our empirical results show that high-frequency-data-based realized quantities lead to better VaR and .VaR; ES/ forecasts. We evaluate these using conditional coverage and dynamic quantile backtests for VaR, regression-based backtests for .VaR; ES/ and comparison tests based on scoring functions and model confidence sets. The study includes data sets covering the global financial crisis of 2007–9 and the Covid-19 pandemic to ensure stability over different market conditions. The results indicate that realized quantity extensions improve forecasts in terms of classic and comparison tests for all quantile levels and time periods, with stand-alone VaR forecasts benefiting the most. It is shown that the symmetric absolute value quantile model benefits the most from realized semivariance extension, whereas the asymmetric slope model benefits the most from realized variance extension.","PeriodicalId":46697,"journal":{"name":"Journal of Risk","volume":"27 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135500920","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The importance of being scrambled: supercharged quasi-Monte Carlo","authors":"Sergei Kucherenko, J. Hok","doi":"10.21314/jor.2023.008","DOIUrl":"https://doi.org/10.21314/jor.2023.008","url":null,"abstract":"","PeriodicalId":46697,"journal":{"name":"Journal of Risk","volume":"1 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2023-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"67719984","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Using a skewed exponential power mixture for value-at-risk and conditional value-at-risk forecasts to comply with market risk regulation","authors":"S. Hassani, G. Dionne","doi":"10.21314/jor.2023.002","DOIUrl":"https://doi.org/10.21314/jor.2023.002","url":null,"abstract":"","PeriodicalId":46697,"journal":{"name":"Journal of Risk","volume":"1 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2023-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"67719825","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The informativeness of risk factor disclosures: estimating the covariance matrix of stock returns using similarity measures","authors":"Lukas Tillmann, M. Walther","doi":"10.21314/jor.2023.003","DOIUrl":"https://doi.org/10.21314/jor.2023.003","url":null,"abstract":"","PeriodicalId":46697,"journal":{"name":"Journal of Risk","volume":"1 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2023-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"67719836","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Uncovering the hidden impact: noninvestor disagreement and its role in asset pricing","authors":"Tingli Liu, Jianing Liu, Junjun Ma, Yafei Tai","doi":"10.21314/jor.2023.004","DOIUrl":"https://doi.org/10.21314/jor.2023.004","url":null,"abstract":"","PeriodicalId":46697,"journal":{"name":"Journal of Risk","volume":"1 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2023-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"67719848","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Considering the dual risks of extreme downside liquidity and extreme negative sentiment, we introduce the concept of the joint lower-tail risk of liquidity and investor sentiment (LISR) and construct measures to study the issue of lower-tail risk premiums in the Chinese stock market. Our findings provide convincing evidence that the premiums for LISR measures are significant regardless of the sentiment at the market or firm level. Downside liquidity risk and extreme negative sentiment cannot explain the LISR premiums separately, which means that an extreme downside change in liquidity and extreme negative sentiment have a joint effect on future stock returns. In addition, LISR premiums are robust to various portfolio double sorts, hold for various asset pricing factor models and remain significant when controlling for an extensive list of firm characteristics. Our conclusions have obvious value for improving and enriching the theoretical research on investor sentiment and liquidity risk premiums, and they provide a valuable reference for investors aiming to construct portfolios matching their own risk preferences, and for regulators supervising the market.
{"title":"Research on the premium for the joint lower-tail risk of liquidity and investor sentiment","authors":"Yuting Hou, Xiu Jin, Weiqiang Huang","doi":"10.21314/jor.2023.006","DOIUrl":"https://doi.org/10.21314/jor.2023.006","url":null,"abstract":"Considering the dual risks of extreme downside liquidity and extreme negative sentiment, we introduce the concept of the joint lower-tail risk of liquidity and investor sentiment (LISR) and construct measures to study the issue of lower-tail risk premiums in the Chinese stock market. Our findings provide convincing evidence that the premiums for LISR measures are significant regardless of the sentiment at the market or firm level. Downside liquidity risk and extreme negative sentiment cannot explain the LISR premiums separately, which means that an extreme downside change in liquidity and extreme negative sentiment have a joint effect on future stock returns. In addition, LISR premiums are robust to various portfolio double sorts, hold for various asset pricing factor models and remain significant when controlling for an extensive list of firm characteristics. Our conclusions have obvious value for improving and enriching the theoretical research on investor sentiment and liquidity risk premiums, and they provide a valuable reference for investors aiming to construct portfolios matching their own risk preferences, and for regulators supervising the market.","PeriodicalId":46697,"journal":{"name":"Journal of Risk","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135597542","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The impacts of financial and macroeconomic factors on financial stability in emerging countries: evidence from Turkey’s nonperforming loans","authors":"M. Kartal, F. Ayhan, Merve Altaylar","doi":"10.21314/jor.2022.050","DOIUrl":"https://doi.org/10.21314/jor.2022.050","url":null,"abstract":"","PeriodicalId":46697,"journal":{"name":"Journal of Risk","volume":"1 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2023-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"67720094","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Value-at-risk models: a systematic review of the literature","authors":"Reem Shayya, M. Sorrosal-Forradellas, A. Terceño","doi":"10.21314/jor.2022.053","DOIUrl":"https://doi.org/10.21314/jor.2022.053","url":null,"abstract":"","PeriodicalId":46697,"journal":{"name":"Journal of Risk","volume":"1 1","pages":""},"PeriodicalIF":0.7,"publicationDate":"2023-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"67720179","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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