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​Procyclicality of Empirical Measurements of Risk in Financial Markets

Event Date & Time: 22-Feb-2017 1115hrs - 1230hrs
Venue: Meeting Room 2 (S3-01a-37) Nanyang Business School
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In this study we empirically explore the capacity of historical VaR to correctly predict the future risk of a financial institution. We observe that rolling samples are better able to capture the dynamics of future risks. We thus introduce another risk measure, the Sample Quantile Process (SQP), which is a generalisation of the VaR calculated on a rolling sample, and study its behavior as a predictor by varying its parameters. We analyse various realisations of this process through 11 different stock indices of well developed stock markets. Moreover, we study the behavior of the future risk as a function of past volatility. We show that, in all the cases empirically studied, if the past volatility is low, the historical computation of the risk measure underestimates the future risk, while in period of high volatility, the risk measure overestimates the risk, confirming that the current way financial institutions measure their risk is highly procyclical. This has important consequences for the regulation in times of crisis.
About the speaker

Michel Dacorogna, is head of DEAR-Consulting, a company advising financial institutions on actuarial and economic matters. He is the former scientific advisor to the chairman of SCOR. He conducts research in the field of insurance mathematics, capital management and risks. He presents models and capital management techniques to management and customers. He is Member of the board of the Research Center on Insurance Risk at the Nanyang Technical University of Singapore, he collaborates with the center on their various initiatives. Until July 2013, Michel was deputy group CRO of SCOR in charge of Solvency II and the internal model. He was at the origin of SCOR’s internal model, which he developed with his team for more than 10 years.  Author and co-author of more than 85 publications in refereed scientific journals; he is often invited to present his results in international conferences and specialis​ed seminars. His work is referenced in many publications. One of the papers he co-authored was the most quoted paper over 5 years in the Journal of Banking and Finance. His book: “An Introduction to High Frequency Finance” remains a reference in the field. He also lectures at the ETH and University of Zurich, at the University Ca’Foscari in Venice (Italy) and at the University of Turin (Italy) in their master of finance and insurance programs.  He received his Habilitation, Ph. D. and M. Sc. in Theoretical Physics from the University of Geneva in Switzerland and did a post-doc at the University of California in Berkeley.

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