Insurance Value Theory And Its Application

Researchers in the field of financial economics have long recognized the importance of measuring the risk of a portfolio of financial assets or securities. Indeed, concerns go back at least four decades, when Markowitz's pioneering work on portfolio selection (1952) explored the appropriate definition and m/fceasurement of risk.In his papers, he showed how to create a frontier of investment portfolios,such as each of them had the greatest possible expected rate of return, given their level of risk. Then Sharpe, Linter, Mossion and Ross, etc. developed Markowitz's mean-variance model, leaded to standard investment models like capital asset pricing model (CAPM), single-index model and arbitrage pricing theory(APT). But those model still does not give a simple answer to the most basic question "What is the current risk?", which every financial institution should ask itself.In recent years, the growth of trading activities and instances of financial market instability have prompted new studies underscoring the need for market participants to develop reliable risk measurement techniques. One technique advanced in the literature involves the use of "value-at-risk" models. These models measure the market, or price, risk of a portfolio of financial assets梩hat is, the risk that the market value of the portfolio will decline as a result of changes in interest rates, foreign exchange rates, equity prices, or commodity prices. Value-at-risk models aggregate the several components of price risk into a single quantitative measure of the potential for losses over a specified time horizon. These models are clearly regulatory communities is evidence of their growing use. For example, in its recent risk-based capital proposal (1996a), the Basle Committee on Banking Supervision endorsed the use of such models, contingent on important qualitative and quantitative3standards. In addition, the Bank for International Settlements Fisher report (1994) urged financial intermediaries to disclose measures of value-at-risk publicly. The Derivatives Policy Group, affiliated with six large U.S. securities firms, has also advocated the use of value-at-risk models as an important way to measure market risk. The introduction of the RiskMetrics database compiled by J.P. Morgan for use with third-party value-at-risk software also highlights the growing use of these models by financial as well as nonfinancial firms. Clearly, the use of value-at-risk models is increasing but how well do they perform in practice?Practitioners, regulators, and academics have embraced VaR,and many view VaR as a vital component of current "best" practices in risk measurement. This article explores two questions about how to applying value-at-risk models to Chinese securities market. Those are how to allocate asset and control market risk.The paper consists of four chapters:Chapter one mainly introduces the ways of measuring the risk of financial assets. Then it demonstrates the advantage and disadvantage of mean-variance model. And we introduce the definition of Value at Risk. Finally it briefly summaries the main ways progress in calculating the Value at Risk.Chapter two introduces how to allocate assets by using Value at Risk. With benchmark VaR as deficit constrict, we developed the method of allocating assets. Through empirical study, student-distribution with 5 degree of freedom can demonstrates returns of the stocks in Chinese securities market.Chapter three studies on the problem of stress tests. It is another central contents of applying VaR. Stress testing is the process of replaying the tape of past market events to see their effect on current market. With the BCBS's Internal Models Approach and the lOSCO's reports, we developed Chinese securities market stress tests model-IBS model. And the securities company can control market risk ofportfolio assets by adjusting investment positions, setting aside additional risk preparation fund and using options.At last we study the disadvantage of VaR and discuss how to use V...