Nonparametric Factor Analytic Risk Measurement in Common Stocks in Financial Firms : Evidence from Korean Firms

This research examines the efficiency of nonparametric factor analytic approaches in measuring risk in common stocks of Korean financial firms from the risk-management perspective. This paper shows that using only one risk factor extracted from principal component analysis, the parallel shift or market movement factor, has sufficient accuracy for downside risk measures. We assess accuracy by applying Monte Carlo simulation to obtain VaR and ES for the Korean financial sector and industries within the financial sector (banks, insurance companies, and investment & security trading companies), and further estimate the risk contagious effect on financial firms