Market risk modelling refers to the application of models to the estimation of losses on a portfolio arising from the movement of market prices. Market risk models are used to measure potential losses from interest rate risk, equity risk, currency risk and commodity risk – as well as the probability of these potential losses occurring. The value-at-risk or VAR method is widely used within market risk models. Expected shortfall is another popular calculation methodology – a comparison between the two measures can be found here. Increasingly, both metrics are being supplemented and in some cases supplanted by methods which instead rely on stressing portfolios against hypothetical market moves.
MARKET RISK MODELLING
