The commodities include oil, gas, salmon and aluminum, while the stocks are Statoil, Seadrill, DNO, Lufthansa, SAS, Norwegian, MHG and Norsk Hydro.
Further it tests value-at-risk (Va R) estimation of market risk using EWMA and GARCH models to improve the historical model of volatility.
Value at risk (Va R) is a statistic that measures and quantifies the level of financial risk within a firm, portfolio or position over a specific time frame.
This metric is most commonly used by investment and commercial banks to determine the extent and occurrence ratio of potential losses in their institutional portfolios.
Va R modeling determines the potential for loss in the entity being assessed and the probability of occurrence for the defined loss.
One measures Va R by assessing the amount of potential loss, the probability of occurrence for the amount of loss, and the timeframe.
As a result, the underestimations of occurrence and risk magnitude left institutions unable to cover billions of dollars in losses as subprime mortgage values collapsed.
Value at risk has become the standard risk measure of financial institutions during the past twenty years.
Aluminum has a more random affect on the stocks, affecting mostly airlines and oil service companies as they are more dependent on aluminum price for their equipment.
The Va R estimation results show that the EWMA performs best for the four commodities, although only at 5% significance level.