« About Sunando Roy |
Main
| Commodity Futures Market and the Indian Farmer »
March 26, 2007
Market Risk Modeling Challenges in Emerging Markets
Market Risk Modeling in emerging markets is beset with a host of difficulties that advanced financial market analysts need not bother about. Managing simple stuff often becomes rather complex. This complexity in the emerging market risk analysis arises from the lack of depth( illiquidity),extreme volatility and more outliers(fat tails), frequent regime changes in transitional markets leading to structural breaks, lack of data and detailed tick-by-tick information gathering mechanisms and so on. While data inadequacies and structural breaks constrain the use of advanced models that are data dependent ( EVT). Often, financial market analysts are left with limited choice of models, known to be error-prone if financial returns are thick tailed. Risks are high in illiquid pockets and very often, there are no proper measurement techniques.
The growing breed of risk managers who depend on emerging market analysis must also take care of country specific macroeconomic specificities and their impact on their model through stress testing. My blog plans to discuss these issues and more from the world of credit risk modeling and operational risk modeling. Comments from the practitioners are most welcome as it will help to thrash out critical issues and help in understanding and improving our practice of emerging market risk management.
Posted by sunandoroy at March 26, 2007 12:17 PM
