Support Measures

Abstract

We have selectively presented a few risk measures in the preceding chapters that, in our experience, cover many relevant aspects and tasks in a real-world market risk setup. We propose to mainly use the volatility-rescaled historical VaR[Ω] for daily risk management. It is especially well-suited to capturing “tomorrow’s PnL,” as it reacts fast to changes in volatility levels. The concurrent use of the sensitivity-based analytical VaR(s ^Ω) serves as a sanity check and provides an additive decomposition to VaR-contributions of the risk factors, which is a handy analysis tool because it appropriately weighs risk factors by both their sensitivity and volatility. Finally, the most helpful measure we take away from the expected shortfall world is the position-wise conditional expected shortfall cES[α|Ω], which provides a useful complementary breakdown of risk to positions.