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Risk measurement and management in a crisis-prone world

Wong, Woon K. and Copeland, Laurence Sidney 2008. Risk measurement and management in a crisis-prone world. [Working Paper]. Social Science Research Network. Available at: http://dx.doi.org/10.2139/ssrn.1265285

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Abstract

The current subprime crisis has prompted us to look again into the nature of risk at the tail of the distribution. In particular, we investigate the risk contribution of an asset, which has infrequent but huge losses, to a portfolio using two risk measures, namely Value-at-Risk (VaR) and Expected Shortfall (ES). While ES is found to measure the tail risk contribution effectively, VaR is consistent with intuition only if the underlying return distribution is well behaved. To facilitate the use of ES, we present a power function formula that can calculate accurately the critical values of the ES test statistic. This in turn enables us to derive a size-based multiplication factor for risk capital requirement.

Item Type: Monograph (Working Paper)
Date Type: Completion
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
Uncontrolled Keywords: Value-at-Risk, expected shortfall, tail risk contribution, saddlepoint technique, risk capital.
Publisher: Social Science Research Network
ISSN: 15565068
Last Modified: 04 Jun 2017 03:34
URI: http://orca.cf.ac.uk/id/eprint/23001

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