Handbook of Heavy Tailed Distributions in Finance

Chapter 11

Multifactor stochastic variance models in risk management Maximum entropy approach and Lévy processes^*

Alexander Levin [e-mail]    Group Risk Management, TD Bank Financial Group, Toronto

Alexander Tchernitser [e-mail]    Bank of Montreal, Toronto

Abstract

This chapter investigates a class of multifactor non-normal models for Market Risk Management, and, specifically, for Value-at-Risk (VaR) calculations, with stochastic variance (SV) driven by Lévy processes. Relevant statistical and dynamic properties for the risk factors are discussed. A short review of the Market Risk Management requirements and stochastic models for VaR is presented.

In the case of one asset, a broad class of pure jump Generalized Gamma ...