Strategic stock markets risk assessment in emerging economies

The aim of this study is to fill a gap in modern risk management literature and especially from the perspective of stock markets in emerging economies. This paper provides pioneering strategic risk assessment techniques that can be applied to investment and trading portfolios in emerging financial markets, such as in the context of the Gulf Cooperation Council (GCC) stock markets. In this work, key equity price risk assessment methods and modeling techniques that financial entities, regulators and policymakers should consider in developing their daily price risk management objectives are examined and tailored to the particular needs of emerging markets. This is with the intent of setting-up the basis of a modeling technique for the measurement of strategic equity price exposures in the day-to-day financial trading operations. While extensive literatures have reviewed the statistical and economic proposition of Value at Risk (VaR) models, this paper provides real-world modeling techniques that can be applied to financial trading portfolios under the notion of illiquid and adverse financial market circumstances. In this paper, we demonstrate a practical modeling approach for the measurement of stock markets risk exposure for financial trading portfolios that contain several illiquid equity asset positions. This approach is based on the renowned concept of liquidity-adjusted VaR (LVaR) along with the innovation of a simulation tool utilizing matrix-algebra technique. To this end, a matrix-algebra modeling technique is used to create the necessary quantitative infrastructures and trading risk simulations. This tactic is a useful form to avoid mathematical complexity, as more and more securities are added to the portfolio of assets. In addition, it can simplify the financial modeling and programming process and can allow as well a clear-cut incorporation of short (sell) and long (buy) positions in the daily risk management process. As such, our broad risk model can simultaneously handle LVaR appraisal under normal and severe market conditions besides it takes into account the effects of liquidity of the traded equity securities. In order to illustrate the proper use of LVaR and stress-testing methods, real-world paradigms of trading risk assessment are presented for the GCC stock markets. To this end, simulation case studies are attained with the aspiration of bringing about a reasonable framework for the measurement of equity trading risk exposures. The modeling techniques discussed in this paper will aid financial markets' participants, regulators and policymakers in the instigation of meticulous and up to date simulation algorithms to handle equity price risk exposure. The suggested analytical methods and procedures can be put into practice in virtually all emerging economies, if they are bespoke to correspond to every market's preliminary level of intricacy