Capturing Downside Risk in Financial Markets: The Case of the Asian Crisis

Working Paper No. 2

Posted: 4 Jan 2000

See all articles by Rachel A.J. Pownall

Rachel A.J. Pownall

Tilburg University - Department of Finance; Maastricht University - Department of Finance

Kees C. G. Koedijk

Tilburg University - Department of Finance

Date Written: July 1999

Abstract

Using data on Asian equity markets, we observe that during periods of financial turmoil, deviations from the mean-variance framework become more severe, resulting in periods with additional downside risk to investors. Current risk management techniques failing to take this additional downside risk into account will underestimate the true Value-at-Risk with greater severity during periods of financial turnoil. We provide a conditional approach to the Value-at-Risk methodology, known as conditional VaR-x, which to capture the time variation of non-normalities allows for additional tail fatness in the distribution of expected returns. These conditional VaR-x estimates are then compared to those based on the RiskMetricsTM methodology from J.P. Morgan, where we find that the model provides improved forecasts of the Value-at-Risk. We are therefore able to show that our conditional VaR-x estimates are better able to capture the nature of downside risk, particularly crucial in times of financial crises.

JEL Classification: G15, C14, C53, N25

Suggested Citation

Pownall, Rachel Ann Jane and Koedijk, Kees G., Capturing Downside Risk in Financial Markets: The Case of the Asian Crisis (July 1999). Working Paper No. 2. Available at SSRN: https://ssrn.com/abstract=172534

Rachel Ann Jane Pownall (Contact Author)

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

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