Financial Market Risk Measurement Under The Condition Of Fat Tail

The influence of United States subprime crisis has not yet gone, the Europeandebt crisis come after it. With the financial market liberalization process isaccelerated further, the diversification and complexity of financial innovation, mixedoperation in financial institutions, financial market risk management and control hasbecome a urgent task for government and financial institutions. Particularly inemerging markets like China, whose characteristic is the financial market mechanismis not perfect and financial risk management is just at initial stage. So a reasonableand effective measure of financial market risk is the premise and core for market risk.With the development of financial theory，the measurement methods of financialmarket risk has developed from name, the sensitivity of the assay, fluctuation methodto VaR method,which is popular all around the world and for governments andfinancial institutions to use. These methods are based on the market is a normal waveassumption. While a large number of empirical analysis after many Chinese scholarssuggest that the Chinese stock market as an emerging market, whose indexfluctuation does not obey the theory of efficient market hypothesis (EMH) andfluctuation rate distribution tended to show a abnormal distribution and lognormaldistribution. Many empirical analysts prove that Chinese stock market returnvolatility often shows the thick tail and asymmetric morphology. We can’t use the pasteffective market assumption method when we measure financial market risk, becausethat would overestimate or underestimate financial market risk. It would lead that wecan’t manage the financial risk well, what worse is that will cause the entire financialmarket turmoil even bring financial crisis. With China’s market-oriented interest rateprocess and capital account opening and the development of derivative financialinstruments, financial market risk of China presents a more complex situation. Thisrequires us to use new metrics to measure and manage market risk. While the EVTmodel to explain the fluctuation rate of the thick tail and asymmetry has its uniqueadvantages. It also has relative advantage than using VaR method when it measuresstock market volatility under emerging market abnormal or extreme cases. This paperuses EVT model measures risk value of composite index of Shanghai stock marketreturn volatility and undergo the corresponding return test. Finally take a comparisonin VaR and EVT method the calculated results. Then we can undergo a reasonablemanagement and control for the financial market risk based on the empirical results.Finally, we put forward the policy suggestion through the empirical results.