The importance of accurate risk modelling techniques for corporate owners and managers: an application of distribution fitting to illiquid securities

The Normal distribution is both the most commonly cited and highly parameterised of all the known probability distribution functions. This research highlights the importance of probing beyond standard textbook theory which assumes, for risk modelling purposes, that an asset’s return should follow a Normal distribution. Methods of modelling the stochastic price process of two illiquid securities, in order to manage price risk within a simple GARCH Value-at-Risk framework are examined. This analysis was developed using Microsoft Excel, IHS’s EVIews and Palisade’s Decision Tools Suite. These widely used tools are chosen to allow for ease of replication of this analysis for any interested market participant and can be expanded to portfolios of liquid and illiquid assets. By ensuring a strict and efficient risk modelling template owners and managers alike are in turn held accountable to all company stakeholders.

Illiquid Securities ,

Risk Modelling ,

Corporate Accountability ,

GARCH ,

Monte Carlo Simulation ,