The financial world has always been risky, but for a variety of reasons the risks have increased over the last few decades. One reason is an increase in volatility. Equity returns are more volatile, as can be seen in Figure 11.1 where the average absolute value of daily log returns of the S&P 500 has approximately doubled over the period from 1993 to 2003. Foreign exchange rates are more volatile now than before the breakdown in the 1970s of the Bretton Woods agreement of fixed exchange rates.1 Interest rates rose to new levels in the late 1970s and early 1980s, have risen and fallen several times since then, and are now (in 2003) extremely low. Figure 4.7 shows that interest rate volatility has itself varied over time but has certainly been higher since 1975 than before.
KeywordsRisk Measure Nonparametric Estimate Call Option Initial Investment Return Distribution
Unable to display preview. Download preview PDF.
- Alexander, C. (2001) Market Models: A Guide to Financial Data Analysis, Wiley, Chichester.Google Scholar
- Artzner, P., Delbaen, F., Eber, J-M., and Heath, D. (1997) Thinking coherently, RISK, 10, 68–71.Google Scholar
- Hull, J. C. (2003) Options, Futures, and Other Derivatives, 5th Ed., Prentice-Hall, Upper Saddle River, NJ.Google Scholar
- Jorion, P. (2001) Value At Risk, McGraw-Hill, New York.Google Scholar
- Scaillet, O. (2003) Nonparametric estimation of conditional expected shortfall, manuscript.Google Scholar