Computational Tools for the Analysis of Market Risk

The estimation and management of risk is an important and complex task faced by market regulators and financial institutions. Accurate and reliable quantitative measures of risk are needed to minimize undesirable effects on a given portfolio from large fluctuations in market conditions. To accomplish this, a series of computational tools has been designed, implemented, and incorporated into MatRisk, an integrated environment for risk assessment developed in MATLAB. Besides standard measures, such as Value at Risk (VaR), the application includes other more sophisticated risk measures that address the inability of VaR properly to characterize the structure of risk. Conditional risk measures can also be estimated for autoregressive models with heteroskedasticity, including some novel mixture models. These tools are illustrated with a comprehensive risk analysis of the Spanish IBEX35 stock index.