Typical value-at-risk (VAR) calculations involve the probabilities of extreme dollar, based on the statistical distributions of market prices. Such quantities do not account for the fact that the same dollar loss can have two very different economic valuations, depending on business conditions and market trends. In this projects, we propose a nonparametric VAR measure that incorporates economic valuation according to the state-price density associated with the underlying price processes.
Relevant Publications and Preprints:
Ait-Sahalia Y., and A. Lo, 2000 “Nonparametric Risk Management and Implied Risk Aversion,” Journal of Econometrics 94, 9-51.
© 2008 MIT Sloan