Quantitative Risk Management in Volatile Markets with an Expectile-Based Framework for the FTSE Index

TL;DR

This paper introduces an expectile-based risk management framework for the FTSE 100 index, improving tail risk sensitivity and stability during market stress compared to traditional methods.

Contribution

It develops novel expectile regression models and robust backtesting techniques, advancing risk measurement in volatile markets beyond conventional quantile-based approaches.

Findings

Expectile-based VaR outperforms traditional VaR during volatile periods.

The framework provides more stable and accurate risk estimates in extreme market conditions.

Practical guidelines for implementation and regulatory compliance are established.

Abstract

This research presents a framework for quantitative risk management in volatile markets, specifically focusing on expectile-based methodologies applied to the FTSE 100 index. Traditional risk measures such as Value-at-Risk (VaR) have demonstrated significant limitations during periods of market stress, as evidenced during the 2008 financial crisis and subsequent volatile periods. This study develops an advanced expectile-based framework that addresses the shortcomings of conventional quantile-based approaches by providing greater sensitivity to tail losses and improved stability in extreme market conditions. The research employs a dataset spanning two decades of FTSE 100 returns, incorporating periods of high volatility, market crashes, and recovery phases. Our methodology introduces novel mathematical formulations for expectile regression models, enhanced threshold determination techniques using time series analysis, and robust backtesting procedures. The empirical results demonstrate that expectile-based Value-at-Risk (EVaR) consistently outperforms traditional VaR measures across various confidence levels and market conditions. The framework exhibits superior performance during volatile periods, with reduced model risk and enhanced predictive accuracy. Furthermore, the study establishes practical implementation guidelines for financial institutions and provides evidence-based recommendations for regulatory compliance and portfolio management. The findings contribute significantly to the literature on financial risk management and offer practical tools for practitioners dealing with volatile market environments.