Date of Publication

2007

Document Type

Master's Thesis

Degree Name

Master of Science in Financial Engineering

Subject Categories

Finance and Financial Management

College

Ramon V. Del Rosario College of Business

Department/Unit

Financial Management

Thesis Adviser

Rene B. Hapitan

Defense Panel Chair

Neriza M. Delfino

Defense Panel Member

Leonardo B. Araneta
Ma. Esperanza F. Joven

Abstract/Summary

Assessing the Value at Risk of extreme events such as a stock market crash has been an important issue in the risk management of financial portfolios. Extreme Value Theory has provided the solid fundamentals needed for the statistical modeling of such events. Market crashes and other periods of high volatility have created the need for a worldwide adoption of financial innovation and this has offered considerable challenge to financial engineers.

This study described and compared the three extreme value distributions (Weibull, Gumbel and Fréchet distributions) using the Generalized Extreme Value approach to Value at Risk. Using the daily returns of the Philippine stock market index from 1986 to 2006 that covered a total of 5,476 trading days, the proponent investigated the behavior of extreme value distributions at different levels of confidence.

This study was the first attempt to apply crash option valuations in the Philippine Stock Market. Using the Black-Scholes Option Pricing Theory, the proponent integrated the estimated extreme volatilities in the model to examine the premiums and payoffs incorporated in the product. Custom tailored Over-the-Counter options were considered since no organized exchange has existed yet in the market. Extensions of the model led to the assessment of more sophisticated crash options. Exotic options considered were the Lookback Put Option and the Cash-or-Nothing Digital Put Option.

Finally, the study presented various illustrative examples including the application of the model on a Philippine Equity Mutual Fund.

Abstract Format

html

Language

English

Format

Electronic

Accession Number

CDTG004148

Shelf Location

Archives, The Learning Commons, 12F Henry Sy Sr. Hall

Physical Description

vi, 104 leaves

Keywords

Financial risk management; Extreme value theory; Value distribution theory; Stock exchanges—Philippines; Stocks—Philippines

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