The Estimation of Market Risk in Portfolios of Stocks and Stock Options

Schmalenbach Business Review, Special Issue, Vol. 54, No. 1-02, pp. 171-189, 2002

25 Pages Posted: 6 Jul 2006

See all articles by Hermann Locarek-Junge

Hermann Locarek-Junge

Dresden University of Technology

Ralf Prinzler

KfW Banking Group

Mario Strassberger

Zittau Goerlitz University of Applied Sciences

Abstract

Market risk can be described as potential losses in portfolio value caused by price changes in the investor's portfolio. Value-at-Risk (VaR) quantifies a loss bound that cannot be exceeded with a specified probability at a given time horizon, i.e., a quantile of the portfolio's loss distribution. We cannot determine this distribution of portfolio losses analytically for portfolios with nonlinear loss functions - especially those portfolios that include options - even if the distribution of risk factors is multivariatenormal. In such cases it is common practice to use extensive approximations and simulations under partly restrictive assumptions. To avoid such reductions, this paper uses approaches based on artificial neural networks (ANN).

Keywords: delta-gamma Approximation, Gaussian mixture density model, Hierarchical Mixtures of Experts, market risk, Mixture Density Networks, option portfolio, forecast, Value-at-Risk

JEL Classification: C10, C13, C14, C45, G12, G13

Suggested Citation

Locarek-Junge, Hermann and Prinzler, Ralf and Strassberger, Mario, The Estimation of Market Risk in Portfolios of Stocks and Stock Options. Schmalenbach Business Review, Special Issue, Vol. 54, No. 1-02, pp. 171-189, 2002. Available at SSRN: https://ssrn.com/abstract=912401

Hermann Locarek-Junge (Contact Author)

Dresden University of Technology ( email )

Einsteinstrasse 3
Dresden, 01062
Germany

Ralf Prinzler

KfW Banking Group ( email )

Palmengartenstrasse 5-9
60325 Frankfurt am Main
Germany

Mario Strassberger

Zittau Goerlitz University of Applied Sciences ( email )

Theodor-Koerner-Allee 16
Zittau, DE-02763
Germany
+49 3583 612 4678 (Phone)
+49 3583 612 3809 (Fax)

HOME PAGE: http://f-w.hszg.de/start-f-w/professoren/prof-dr-rer-pol-mario-strassberger.html

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