Title: A use of Black-Scholes model in market risk

Authors: Panos Xidonas; Christos E. Kountzakis; Christis Hassapis; Christos Staikouras

Addresses: Department of Finance, ESSCA Grande École, 55 quai Alphonse Le Gallo, 92513, Paris, France ' Department of Mathematics, Economics University of the Aegean, Karlovassi, 83200, Samos, Greece ' Department of Economics, Finance University of Cyprus, PO Box 20537, 1678, Nicosia, Cyprus ' Department of Accounting & Finance, University of Economics & Business, 76 Patission Str., 10434, Athens, Greece

Abstract: The aim of this paper is to use the Black-Scholes model for market risk by using the estimated drift and volatility of a stock-return for a relatively small time-horizon, in case where the historical returns are better-fitted to a normal distribution. In this case, we may use the infinitesimal operator of the complete market formulated by the stock and the numeraire by taking the interest rate also constant and equal to the mean reference rate for the turning of theoretical and historical VaR to an economic capital functional.

Keywords: systemic risk; market risk; Black-Scholes model; VaR; value at risk; estimated drift; volatility; stock returns; interest rates.

DOI: 10.1504/IJFERM.2016.082983

International Journal of Financial Engineering and Risk Management, 2016 Vol.2 No.3, pp.200 - 210

Received: 10 May 2016
Accepted: 25 Aug 2016
Published online: 17 Mar 2017 *

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