RISKY RISK MEASURES: A NOTE ON UNDERESTIMATING FINANCIAL RISK UNDER THE NORMAL ASSUMPTION
Journal Title: Copernican Journal of Finance & Accounting - Year 2016, Vol 5, Issue 2
Abstract
This note compares three different risk measures based on the same stock return data: (1) the portfolio variance as in Markowitz (1952), (2) the value at risk based on the historical return distribution, and (3) the value at risk based on a t copula. Unless return series follow a Normal distribution, Normal-based risk measures underestimate risk, particularly so during periods of market stress, when accurate risk measurement is essential. Based on these insights, we recommend that supervisors discontinue to accept Normal-based value at risk estimations. We are happy to share our commented R-code with practitioners who wish to implement our methodology. Risk measurement is the foundation of risk management and hence of vital importance in any financial institution. Supervisory capital requirements according to Basel III or Solvency II are also derived from risk measures. Investors are interested in ratings which are based on risk assessments. This note is therefore relevant to practitioners and supervisors alike.
Authors and Affiliations
Christiane Goodfellow, Christian Salm
Keywords
Related Articles
- EP ID EP192432
- DOI 10.12775/CJFA.2016.017
- Views 89
- Downloads 0
Sustainable Development in Norway on the example of Government Pension Fund Global
This article is an attempt to assess the functioning of the Norwegian Government Pension Fund Global in relation to the degree of implementation of the concept’s objectives of sustainable development. The aim of the arti...
CONVERGENCE OF HEALTH EXPENDITURE IN EU 12 AND V4 STATES
The subject of this paper is an attempt to assess the level of convergence of government health spending in the European Union countries. The ever-increasing level of life expectancy, demographic changes, including the a...
INDIVIDUAL INVESTORS ON THE FINANCIAL MARKET IN POLAND
The influence of individual investors on the functioning of the financial market makes them a very important group of its participants. The observed growth of the financial market in Poland generates more investment oppo...
LEGAL REGULATION OF TOURISM BUSINESS IN GEORGIA
Research objective: Georgia, as a country favorable for tourism, can offer the various types of tourism products and therefore, is presented as an attractive country for travelers. The research aims: to analyze tourism b...
Crypto currency – a new challenge for the economy of Georgia
The popularity of electronic currencies on the world innovative technology market increases daily. The history of currency development and the need for additional monetary means has led to the creation of a crypto curren...