Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/258029 
Year of Publication: 
2020
Citation: 
[Journal:] Risks [ISSN:] 2227-9091 [Volume:] 8 [Issue:] 3 [Article No.:] 76 [Publisher:] MDPI [Place:] Basel [Year:] 2020 [Pages:] 1-17
Publisher: 
MDPI, Basel
Abstract: 
This paper investigates the risk exposure for options and proposes MaxVaR as an alternative risk measure which captures the risk better than Value-at-Risk especially. While VaR is a measure of end-of-horizon risk, MaxVaR captures the interim risk exposure of a position or a portfolio. MaxVaR is a more stringent risk measure as it assesses the risk during the risk horizon. For a 30-day maturity option, we find that MaxVaR can be 40% higher than VaR at a 5% significance level. It highlights the importance of MaxVaR as a risk measure and shows that the risk is vastly underestimated when VaR is used as the measure for risk. The sensitivity of MaxVaR with respect to option characteristics like moneyness, time to maturity and risk horizons at different significance levels are observed. Further, interestingly enough we find that the MaxVar to VaR ratio is higher for stocks than the options and we can surmise that stock returns are more volatile than options. For robustness, the study is carried out under different distributional assumptions on residuals and for different stock index options.
Subjects: 
Pearson Type-IV
VaR
P&L
MaxVaR
JEL: 
G13
G17
G32
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
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