Abstract
The banking systems that deal with risk management depend on underlying risk measures. Following the Basel II accord, there are two separate methods by which banks may determine their capital requirement. The Value at Risk measure plays an important role in computing the capital for both approaches. In this paper we analyze the errors produced by using this measure. We discuss other measures, demonstrating their strengths and shortcomings. We give examples, showing the need for the information from multiple risk measures in order to determine a bank’s loss distribution. We conclude by suggesting a regulatory requirement of multiple risk measures being reported by banks, giving specific recommendations.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Artzner, P., Delbaen, F., Eber, J., Heath, D.: Thinking coherently. Risk 10, 68–71 (1997)
Basel Committee on Banking Supervision: International Convergence of Capital Measurement and Capital Standards. BIS, Basel (1988)
Basel Committee on Banking Supervision: Amendment to the Basel Capital Accord to Incorporate Market Risk. BIS, Basel (1996)
Basel Committee on Banking Supervision: Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework. BIS, Basel (2005)
Bassi, F., Embrechts, P., Kafetzaki, M.: A survival kit on quantile estimation, working paper: Department of Mathematics. ETHZ, Zurich (1996)
Caillault, C., Guégan, D.: Forecasting VaR and expected shortfall using dynamical systems: a risk management strategy. Front Financ 6, 26–50 (2009)
Calculated Risk at http://www.calculatedriskblog.com
Fama, E.: The behavior of stock markets. J Bus 38, 34–54 (1965)
Guégan, D., Hassani, B.: A modified Panjer algorithm for operational risk capital calculations. J Oper Risks 4, 1–20 (2009)
Guegan, D., Hassani B.: Operational Risk : Multivariate VaRs for Operational Risk Capital Computation: A Vine Structure Approach, Documents de travail du Centre d’Economie de la Sorbonne 2011.17-ISSN : 1955–611X (2011) (to be published)
Guégan, D., Hassani, B., Naud, C: An efficient threshold choice for the computation of operational risk capital, J Oper Risk 6 4, 3–19 (Winter 2011/2012)
Hogg, R., Klugman, S.: Loss Distributions. Wiley, New York (1984)
J.P. Morgan Guaranty Trust Company: RiskMetrics-Technical Document, 4 edn. (1996)
Kolman, J., Onak, M., Jorion, P., Taleb, N., Derman, E., Putnam, B., Sandor, R., Jonas, S., et al. : Roundtable: the limits of VaR. Deriv Strategy (1998)
Mandelbrot, B.: The variation of speculative prices. J Bus 36, 394–414 (1963)
Markowitz, H.: Portfolio selection. J Financ VII, 77–91 (1952)
Merriam-Webster, Merriam-Webster’s Collegiate Dictionary (Merriam-Webster, New York), (2003)
Rockafellar, R.T., Uryasev, S.: Conditional value-at-risk for general loss distributions. J Bank Financ 26, 1443–1471 (2002)
Stulz, R.M.: Rethinking risk management. J Appl Corp Financ, 8–24 (Fall 1996)
Yamai, Y., Yoshiba, T.: Comparative analyses of expected shortfall and value-at-risk: their validity under market stress. Monet Econ Stud Bank Jpn 20, 181–238 (2002)
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Guégan, D., Tarrant, W. On the necessity of five risk measures. Ann Finance 8, 533–552 (2012). https://doi.org/10.1007/s10436-012-0205-2
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10436-012-0205-2