Behavioral Approach to Market and Default Risks Modeling
31 Pages Posted: 29 Dec 2009
Date Written: December 27, 2009
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: Suggested Citation