|M.Sc Student||Kauffmann Amitay|
|Subject||Constructing the FEER Index - Forecasting Extreme|
|Department||Department of Industrial Engineering and Management||Supervisors||Professor Haim Reisman|
|Dr. Gal Zahavi|
|Full Thesis text|
In 2008, the S&P500 market index had an aggregated loss of 30.16% during three selected trading days. Unfortunately, benchmark risk measures VaR and CVaR didn’t forecast these hazards. Consequently, we witness a growing interest in risk measures, sensitive to high moments and heavy tail risk.
Such measures were proposed by Aumann-Serrano (2008) and Foster-Hart (2009). As an extension of the latter, we construct the FEER Index, a downside risk measure ”Forecasting Extreme Events Risk”, satisfying desirable risk measure properties, particularly sensitivity to higher lower partial moments of the return distribution. We present a closed-form solution of the FEER Index as a function of VaR and CVaR, and show that the FEER Index can be dynamically calibrated to the market, becoming a live seismograph for market catastrophes.