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Risks 2018, 6(4), 121; https://doi.org/10.3390/risks6040121

Do Nonparametric Measures of Extreme Equity Risk Change the Parametric Ordinal Ranking? Evidence from Asia

1
School of Business and Law, Edith Cowan University, 270 Joondalup Drive, Joondalup 6027, Australia
2
Business and Economics Research Centre, Ho Chi Minh City Open University, 97 Vo Van Tan Street, District 3, Ho Chi Minh City 700,000, Vietnam
*
Author to whom correspondence should be addressed.
Received: 10 September 2018 / Revised: 9 October 2018 / Accepted: 11 October 2018 / Published: 14 October 2018
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Abstract

There has been much discussion in the literature about how central measures of equity risk such as standard deviation fail to account for extreme tail risk of equities. Similarly, parametric measures of value at risk (VaR) may also fail to account for extreme risk as they assume a normal distribution which is often not the case in practice. Nonparametric measures of extreme risk such as nonparametric VaR and conditional value at risk (CVaR) have often been found to overcome this problem by measuring actual tail risk without applying any predetermined assumptions. However, this article argues that it is not just the actual risk of equites that is important to investor choices, but also the relative (ordinal) risk of equities compared to each other. Using an applied setting of industry portfolios in a variety of Asian countries (benchmarked to the United States), over crisis and non-crisis periods, this article finds that nonparametric measures of VaR and CVaR may provide only limited new information to investors about relative risk in the portfolios examined as there is a high degree of similarity found in relative industry risk when using nonparametric metrics as compared to central or parametric measures such as standard deviation and parametric VaR. View Full-Text
Keywords: VaR; conditional value at risk; parametric; nonparametric; Asian industries VaR; conditional value at risk; parametric; nonparametric; Asian industries
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Powell, R.J.; Vo, D.H.; Pham, T.N. Do Nonparametric Measures of Extreme Equity Risk Change the Parametric Ordinal Ranking? Evidence from Asia. Risks 2018, 6, 121.

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