Financial Market Risk Management Research: The Var Methodology Is

Market risk refers to the risks of financial losses arising from adverse movements in market prices and rates. In the mean time,market risk is one of the fundamental reasons why other kinds of risks exist. Sources of market risk include equity prices, interest rates, foreign exchange rates and commodity prices which are usually called the market risk factors. Thanks to these factors' high volatilities, the interest in managing market risk has grown during the last two decades among financial institutions and other market participants. A market risk measure called Value-at-Risk (VaR) has been adopted as the most important measure of market risk by most financial institutions and supervising authorities. VaR based risk management is also required by many regulatory bodies. VaR measures the maximum expected loss in monetary terms at a given confidence level over a given forecast period. The risk management can make it certain that how much will be lost and how possibly the lost will take place.In contrast to traditional risk measures, VAR provides an overall view of a portfolio's risk that accounts for leverage, correlations, and current positions. As a result, it is truly a forward-looking risk measure.VAR, however, applies not only to derivatives but to all financial instruments.Furthermore, the methodology can also be broadened from market risk to other types of financial risks.By now VaR has established itself as a key building block of financial risk management system. VaR is ideally suited to institutions that have leverage and that are exposed to multiple sources of risks. This includes institutions that engage in proprietary trading but also asset managers and nonfinancial corporations such as multinationals. First of all, VaR is designed primarily as a device to report financial market risks. The professionals in risk management can aggregate company-wide risks into a single VaR number which seems uniform and intuitively-friendly. No surprise that VaR facilitate the communication as to risk level between top management and shareholders. Furthermore, VaR has recently developed into a powerful tool to control risks more tightly than before by means of setting risk limits in desk level and firmwide. The most comprehensive application of VaR is its role playing in the field of so-call active risk management.With VaR on hands,institutions can decide how to trade-off risk and return. Economic capital can be allocated as a funtion of risks. The risk-adjusted performance make it possible that evaluate traders with regards both to their scores and risks.On the other hand, VaR pave the way for the rest of risk management as well as lay the foundation down for the research frontier in mordern financial theory, especially financial engineering. Due to the VaR's fundamental and flexible attributes mentioned above, this thesis locks VaR as its research target and objective. Through a relative comprehensive analysis on VaR methodology and positive technology, the author hopes to contribute a lot to the risk management industry development of China.On the whole, the thesis concludes the primary principle, mechanism and framework of VaR method. According to the framework, VaR consists of two basic modules: the risk factor volatility model and asset valuation mapping model ,which the thesis details later. Among the discussion, the stochastic features of financial factors movement are emphasized. Especially, the thesis assesses the effects of stochastic behavior in terms of VaR measure, and therefore provides optional solutions in order to mitigate the unfavorable effects.At the end of the thesis, a real financial market risk VaR measure is implemented.Generally speaking, this thesis consists of four chapters. The structure and contents of the thesis described briefly here:The first chapter acts as a kind of general introduction to VaR method. Firstly,the chapter prove VaR significantly important as to financial academics or practitioner.Going further in...