Behavioral Approach to Market and Default Risks Modeling

31 Pages Posted: 29 Dec 2009

Date Written: December 27, 2009

Abstract

This paper can be divided in two sections. First, based on the price model in “Noise trader risk in financial market” by J. Bradford Delong et al. (1987), we analyze the implications to Value at Risk and probability of default in option-theoretic model. We find that bubbles are ill-impounded in VaR and that VaR may be an incentive to bubbles. Then, we claim that the risk measure’s estimator coherence matters more than the risk measure coherence in parametric estimations. As evidence, granted a stable square integrable distribution, we show that the method of moments VaR is coherent and the GARCH(1,1) with variance targeting VaR is not coherent.

Keywords: Noise Trading, Value at Risk, Probability of Default, Risk Measure Coherence, Risk Measure's Estimator Coherence

JEL Classification: G1, G2

Suggested Citation

Taguedong, Chamberlain Sylvain, Behavioral Approach to Market and Default Risks Modeling (December 27, 2009). Available at SSRN: https://ssrn.com/abstract=1528569 or http://dx.doi.org/10.2139/ssrn.1528569

Chamberlain Sylvain Taguedong (Contact Author)

affiliation not provided to SSRN ( email )

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