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| Type | Journal Article |
| Scope | Discipline-based scholarship |
| Title | Intra‐Horizon expected shortfall and risk structure in models with jumps |
| Organization Unit | |
| Authors |
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| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Journal Title | Mathematical Finance |
| Publisher | Wiley-Blackwell Publishing, Inc. |
| Geographical Reach | international |
| ISSN | 0960-1627 |
| Volume | 31 |
| Number | 2 |
| Page Range | 772 - 823 |
| Date | 2021 |
| Abstract Text | The present article deals with intra-horizon risk in models with jumps. Our general understanding of intra-horizon risk is along the lines of the approach taken in Boudoukh et al. (2004); Rossello (2008); Bhattacharyya et al. (2009); Bakshi and Panayotov (2010); and Leippold and Vasiljević (2020). In particular, we believe that quantifying market risk by strictly relying on point-in-time measures cannot be deemed a satisfactory approach in general. Instead, we argue that complementing this approach by studying measures of risk that capture the magnitude of losses potentially incurred at any time of a trading horizon is necessary when dealing with (m)any financial position(s). To address this issue, we propose an intra-horizon analogue of the expected shortfall for general profit and loss processes and discuss its key properties. Our intra-horizon expected shortfall is well-defined for (m)any popular class(es) of Lévy processes encountered when modeling market dynamics and constitutes a coherent measure of risk, as introduced in Cheridito et al. (2004). On the computational side, we provide a simple method to derive the intra-horizon risk inherent to popular Lévy dynamics. Our general technique relies on results for maturity-randomized first-passage probabilities and allows for a derivation of diffusion and single jump risk contributions. These theoretical results are complemented with an empirical analysis, where popular Lévy dynamics are calibrated to the S&P 500 index and Brent crude oil data, and an analysis of the resulting intra-horizon risk is presented. |
| Official URL | https://onlinelibrary.wiley.com/doi/10.1111/mafi.12302 |
| Digital Object Identifier | 10.1111/mafi.12302 |
| Other Identification Number | merlin-id:21653 |
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