A Generalized Fourier Transform Approach to Risk Measures

Details A Generalized Fourier Transform Approach to Risk Measures A Generalized Fourier Transform Approach to Risk Measures

2009-09-22

arxiv.org/abs/0909.3978v1

J. Stat. Mech. (2010) P01005

Economy

Quantitative Finance

Risk Management

10 pages, 4 figures, 5 tables

Scientific paper

10.1088/1742-5468/2010/01/P01005

We introduce the formalism of generalized Fourier transforms in the context of risk management. We develop a general framework to efficiently compute the most popular risk measures, Value-at-Risk and Expected Shortfall (also known as Conditional Value-at-Risk). The only ingredient required by our approach is the knowledge of the characteristic function describing the financial data in use. This allows to extend risk analysis to those non-Gaussian models defined in the Fourier space, such as Levy noise driven processes and stochastic volatility models. We test our analytical results on data sets coming from various financial indexes, finding that our predictions outperform those provided by the standard Log-Normal dynamics and are in remarkable agreement with those of the benchmark historical approach.

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