Tail Risk for Australian Emerging Market Entities

8 Pages Posted: 3 Dec 2011

See all articles by David E. Allen

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); Department of Finance; School of Business and Law, Edith Cowan University

Akhmad Kramadibrata

Edith Cowan University - School of Accounting, Finance and Economics

Robert J. Powell

Edith Cowan University - School of Accounting, Finance and Economics; Financial Research Network (FIRN)

Abhay Kumar Singh

Edith Cowan University

Date Written: December 1, 2011

Abstract

Whilst the Australian economy is widely considered to have fared better than many of its global counterparts during the Global Financial Crisis, there was nonetheless extreme volatility experienced in Australian financial markets. To understand the extent to which emerging Australia entities were impacted by these extreme events as compared to established entities, this paper compares entities comprising the Emerging Markets Index (EMCOX) to established entities comprising the S&P/ASX 200 Index using four risk metrics. The first two are Value at Risk (VaR) and Distance to Default (DD), which are traditional measures of market and credit risk. The other two focuses on extreme risk in the tail of the distribution and include Conditional Value at Risk (CVaR) and Conditional Distance to Default (CDD), the latter metric being unique to the authors, and which applies CVaR techniques to default measurement. We apply these measures both prior to and during the GFC, and find that Emerging Market shares show higher risk for all metrics used, the spread between the emerging and established portfolios narrows during the GFC period and that the default risk spread between the two portfolios is greatest in the tail of the distribution. This information can be important to both investors and lenders in determining share or loan portfolio mix in extreme economic circumstances.

Keywords: Tail risk, emerging Australian companies, extreme risk

JEL Classification: G01, G21, G28

Suggested Citation

Allen, David Edmund and Kramadibrata, Akhmad and Powell, Robert J. and Singh, Abhay Kumar, Tail Risk for Australian Emerging Market Entities (December 1, 2011). Available at SSRN: https://ssrn.com/abstract=1967299 or http://dx.doi.org/10.2139/ssrn.1967299

David Edmund Allen

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Department of Finance ( email )

Taiwan
Taiwan

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

HOME PAGE: http://www.dallenwapty.com

Akhmad Kramadibrata

Edith Cowan University - School of Accounting, Finance and Economics ( email )

270 Joondalup Drive
Joondalup, WA g027
Australia
+61 8 6304 5265 (Phone)

Robert J. Powell (Contact Author)

Edith Cowan University - School of Accounting, Finance and Economics ( email )

Joondalup Campus
Perth
Joondalup 6027, WA
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Abhay Kumar Singh

Edith Cowan University ( email )

Joondalup Drive
Perth
Joondalup, WA 6027
Australia

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