Volatility, risk modeling and utility

摘要

This article develops the foundations for several new models of risk and volatility. Methods used include utility analysis and mathematical psychology. Risk and volatility can be modeled as aggregations of preferences of market participants, and or optimization problems. Market risk assessment is a multi-criteria process that typically requires information processing, and thus cannot be defined accurately by rigid quantitative models. Existing market-risk models (GARCH, ARMA, S-V, VAR, etc.) are inaccurate. Its possible to quantify elements of trading dynamics and market psychology, and hence develop more accurate risk models. Areas for further research include: (a) development of dynamic market-risk models that incorporate psychology, more elements of trading dynamics, knowledge differences, information, and trading rules in each market; and (b) further development of concepts in belief systems.