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Abstract:
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Value at risk (VaR) has been overwhelmed by its applications and researches in daily practices of financial risk management mainly due to its simple form and easily interpretable features. Yet, its serious drawback of underestimating an asset's market risk has been noticed in numerous applications, and many alternative risk measures have been proposed in the literature. We propose a new risk measure termed marketing market value at risk (MMVaR) which accounts for the worst scenario of a portfolio in any given holding period. MMVaR is a natural alternative risk measure to VaR as it is a direct generalization of VaR. It not only maintains easily interpretable features by VaR, but also gives an asset's market risk in a dynamic moving market with any given holding periods. We show that MMVaR is superior than VaR using simulation examples and real data. In real data analysis, we found that risks calculated using MMVaR are about 20% higher than risks calculated using classical VaR methods.
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