Risk Management in Emerging Markets: Practical Methodologies and Empirical Tests
43 Pages Posted: 30 Jun 2015
Date Written: June 30, 2015
Risk management has undergone a remarkable transformation over the past fifteen years, with most new methods having been designed for the concerns of large institutions operating in well-developed financial markets. This paper addresses a problem faced by smaller institutions operating in emerging markets, namely the significant lack of data. As many risk management techniques are data intensive, this problem may seem insurmountable. This paper introduces a new method, enriched historical simulation, which supplements the data in an emerging market with data from other markets. The principle behind this methodology is that when many markets are considered, the essence of emerging market economies comes to the fore, with local idiosyncrasies being washed out. This principle is illustrated on the problem of estimating Value-at-Risk on the Cyprus and Athens Stock Exchanges.
Keywords: risk management; historical simulation; value-at-risk; emerging markets
JEL Classification: C10, C80, G10, G15
Suggested Citation: Suggested Citation