The Research And Application Of Brent Risk Contagion Based On HMM

Recently, it not only to make the country's economy suffered a heavy blow, but also to the financial risk management is facing a more severe challenge, with the Asian Financial Crisis in 1997, and the American subprime mortgage crisis in 2008, and the following European debt crisis breaking out. Therefore, establishing the scientific risk forecasting model, then accurately judges the risk, and effectively forecasts and controls the risk, to maintain financial and economic security and promot the safety of economic society. It is an important duty with the new economic situation by the financial and economic management departments, and also it is a focus of academic issue.With the rapid development of economy, there had more and more financial futures are derived from financial markets. The content of risk management is not limited to normal financial products, and the significance of financial derivatives represented by financial futures becomes increasingly obvious in the risk management. Brent crude oil futures, as an important derivative of Brent's crude market, because it suffers an excessive volatility affected by various economic and political major events, so it maybe bring Structural Breaks; and structure break point is likely to appear in the volatility state. Many studies show that the volatility structure mutation of financial performance can be easily found in financial market. The volatility persistence of financial market could be overestimated, when the structure break points are overlooked, then it maybe misjudge the volatility state. That may lead to failure of risk management in the financial market.The key to forecast the risk of Brent crude oil futures market is accurately forecasting the volatility, but the key to forecast volatility is accurately forecasting the volatility state. For the volatility state of Brent crude oil futures market, the key is the structure break points. If the structure mutation were overlooked in the volatility state prediction, the volatility persistence of financial market could be overestimated. That may lead to the misjudgment of volatility state of financial market and failure to forecast the risk finally. Therefore, the structure break point is significant and valuable for the risk prediction of Brent crude oil futures market in theory and practice.First, HMM is introduced in this paper to forecastt the volatility state of Brent crude oil futures market. Traditional HMM forecast the volatility state based on the logarithmic return rate, but without considering its own volatility's impact on the volatility state. Hence, some false structure mutation points may be found in the measured volatility state based on HMM. For this reason, ICSS-HMM-EGARCH model to correct the volatility state by HMM. And then the volatility is reforecasted by HMM-EGARCH model based on the corrected volatility state. Moreover, SR and MAE were used in the accuracy test of volatility state, and to test the accuracy of the volatility state, and the volatility forecasting was tested with D-M model based on the standard statistical error function. In the end, ES model was introduced forecasting risk of Brent crude oil futures market based on the ICSS-HMM-EGARCH model, and Bachtesting was used to evaluate in the VaR and ES model.Consequently, not only the research methods and the empirical results can offer help for investors to guard against the financial risk and to avoid losses, but also can provide some reference for scholars in the research of financial risk, so the research is significant and valuable in theory and practice application.The empirical results show that, there exists structure breaks point in Brent crude oil futures market; and it maybe exist false volatility structure mutation/breaks based on HMM model, but ICSS-HMM-EGARCH model can recorrect the false volatility structure breaks, thus the forecasting volatility state would be more accurate; the adjusted HMM-EGARCH model can precisely predict/forecast the volatility of Brent crude oil futures market, thus ICSS-HMM-EGARCH model is able to more accurately forecast the volatility structure breaks points of Brent crude oil futures market; it shows higher sensitivity in the volatility of Brent crude oil futures market in the high volatility state, and by using ES method of ICSS-HMM-EGARCH model based on MCMC methodology the risk forecast of Brent crude oil futures market could get more effective.To sum up, in the basis of volatility structure breaks forecast of financial market and combining with the realities of financial market, the decision-making departments and institutional investors can make scientific and reasonable financial risk early-warning plans to avoid losses or lower risks, so as to further promote the prosperity and stability of financial markets.