A simulation environment for discontinuous portfolio value processes

DOI10.1002/ASMB.430MaRDI QIDQ2722288zbMATH OpenOpenAlexFDO

Authors Giorgio Consigli, Antonio Di Cesare

Publication date 11 July 2001

Published in Applied Stochastic Models in Business and Industry (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1002/asmb.430

zbMATH Keywords

credit-spread curvedefault riskjump- diffusion processrisk-neutral pricingvalue-at-risk

Mathematics Subject Classification ID

Diffusion processes (60J60)

Review text

This paper deals with the general structure and analytical framework behind an internally developed simulation environment linking the classical defaultable bond analysis to movements of risky market representative indexes such as the JP Morgan emerging market bond index. The development allows an accurate representation of the factors affecting portfolios subjected to jumps. The system implements a simulator of market shocks driven by a canonical Wiener process and by a Poisson shock arrival process whose parameter is allowed to vary over time. It supports a variety of applications from the estimation of the non-parametric portfolio shortfall distribution (relevant for capital allocation and credit risk management) to the market monitoring for potentially unstable markets and, ultimately, is used as a generator of return processes for the solution of optimal portfolio problems in risky markets, using a 3-d efficient frontier. A novel characterization of the intensity rate of the Poisson process, modelling the arrival of shocks to the market, as a function of a credit spread curve estimated in high-risk emerging bond markets, is introduced. The procedure is described and tested on the August 1998 Russian crisis whose impact on liquid equity markets is also estimated.

Recommendations

• Scenario simulation: Theory and methodology
• Analytical value-at-risk with jumps and credit risk
• Portfolio Value-at-Risk with Heavy-Tailed Risk Factors
• On the simulation of portfolios of interest rate and credit risk sensitive securities
• Fast Simulation of Multifactor Portfolio Credit Risk

Cites work

• DEFAULT RISK INSURANCE AND INCOMPLETE MARKETS
• scientific article; zbMATH DE number 1222802 (Why is no real title available?)
• scientific article; zbMATH DE number 1243473 (Why is no real title available?)
• scientific article; zbMATH DE number 1026574 (Why is no real title available?)
• Martingale Analysis for Assets with Discontinuous Returns
• OPTION PRICING USING THE TERM STRUCTURE OF INTEREST RATES TO HEDGE SYSTEMATIC DISCONTINUITIES IN ASSET RETURNS
• Option pricing when underlying stock returns are discontinuous

Cited in

(3)

• Modelling on optimal portfolio with exchange rate based on discontinuous stochastic process
• Simulation-based Value-at-Risk for nonlinear portfolios
• Handling Discontinuities in Financial Engineering: Good Path Simulation and Smoothing

This page was built for publication: A simulation environment for discontinuous portfolio value processes

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2722288)