Moment based approaches to value the risk of contingent claim portfolios

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Abstract

In this paper we describe and apply the estimating function methodology to value the risk of asset derivative portfolios. We first implement the Li's model based on the first four moments and then we show the limits of this model in forecasting the maximum loss of contingent claims. In addition, we show that four moments are not enough to describe the behavior of the lower percentiles of derivatives. Finally, we propose a model that considers the first six moments and we compare the performances of these models proposing a backtest analysis on several historical and truncated asset derivative portfolios.

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