Risky Business: The 'Failures' of Risk Management

• Activity Number: 423
• Type: Contributed
• Date/Time: Tuesday, August 3, 2010 : 2:00 PM to 3:50 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Christine Wu*+ and John Ryland Pigg
• Companies: North Carolina State University and North Carolina State University
• Keywords: Value at Risk ; Expected Shortfall ; Risk Measurement ; Monte Carlo ; GARCH

Abstract

The events in the stock markets have brought Taleb's "Black Swan Theory" to the forefront. His theory argues that the possibility or importance of rare events should not be ignored. Because of the recent economic chaos, we decided to consider risk management techniques used by companies to prepare for potential losses. While looking at the risk measures involved with portfolio managing, the project aims to determine whether the VaR is a good measure of risk or if Expected Shortfall is a better measure of risk. Stock prices were used to compile different portfolios for analysis. Using the GARCH model and Monte Carlo simulations, a VaR and an Expected Shortfall were calculated for the stock portfolios. We will test our hypothesis concerning types of distributions used with assessing risk management and further evaluate the impacts of VaR versus Expected Shortfall calculations.