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 83
- Downloads 0
A RISK MANAGEMENT SYSTEM IN INSURANCE UNDERTAKING
The purpose of this article is to identify and to define a role of risk management in insurance undertakings, particularly in the light of new regulations. Therefore, an obligatory of implementing a risk management syste...
ROBUSTNESS OF THE BANK RESOLUTION FRAMEWORK IN THE EUROPEAN UNION
The purpose of this article is to identify the key elements of resolution framework under the Single Resolution Mechanism (SRM) and to assess the robustness of the bank resolution framework in the European Union (EU). Th...
USING ACCOUNTING INFORMATION FOR STRATEGIC DECISION-MAKING IN A MULTI-SEGMENTED COMPANY
The reason of being of corporate accounting is not only to record, interpret and present data about existing business processes, but also to provide information for supporting main decision-making activities of managemen...
MATHEMATICAL MODEL FOR THE EVOLUTIONARY DYNAMIC OF INNOVATION IN CITY PUBLIC TRANSPORT SYSTEMS
In this study, a mathematical model is formulated and studied from the perspective of adaptive dynamics (evolutionary processes), in order to describe the interaction dynamics between two city public transport systems: o...
INVESTMENT PLATFORMS EVOLUTIONS – ETF FUNDS
Investment platforms, despite the short length of service on the Polish market, subject to continuous development. The nucleus of the creation of this product were the umbrella investment funds. They allowed free passage...