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2016 | 5 | nr 2 | 85--108
Tytuł artykułu

Risky Risk Measures : a Note on Underestimating Financial Risk under the Normal Assumption

Treść / Zawartość
Warianty tytułu
Języki publikacji
EN
Abstrakty
EN
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. (original abstract)
Rocznik
Tom
5
Numer
Strony
85--108
Opis fizyczny
Twórcy
  • Jade University, Germany
  • Jade University, Germany
Bibliografia
  • Campbell, R., Huismann, R., & Koedijk, K. (2001). Optimal portfolio selection in a Valueat-Risk framework. Journal of Banking and Finance, 25(9), 1789-1804. doi: http://dx.doi.org/10.1016/S0378-4266(00)00160-6.
  • Fama, E. (1965). The Behavior of Stock Market Prices. Journal of Business, 38(1), 34-105. doi: http://dx.doi.org/10.1086/294743.
  • Malkiel, B. (2003). Passive Investment Strategies and Efficient Markets. European Financial Management, 9(1), 1-10. doi: http://dx.doi.org/10.1111/1468-036X.00205.
  • Mandelbrot, B. (1963). The Variation of Certain Speculative Prices. Journal of Business, 36(4), 394-419. doi: http://dx.doi.org/10.1086/294632.
  • Markowitz, H. (1952). Portfolio Selection. Journal of Finance, 7(1), 77-91. doi: http://dx.doi.org/10.2307/2975974.
  • Markowitz, H. (1959). Portfolio Selection: Efficient Diversification of Investments. 16. New York: Cowles Foundation, Wiley. Second edition 1991, Blackwell, Oxford, UK.
  • Peters, E.E. (1996). Chaos and Order in the Capital Markets: A New View of Cycles, Prices, and Market Volatility, 2nd edition. John Wiley and Sons.
  • Rachev, S.T, Höchstötter, M., Fabozzi F.J., Focardi, S.M. (2010). Probability and Statistics for Finance. The Frank Fabozzi Series. New Jersey, Hoboken: John Wiley & Sons.
  • Rockafellar, R., & Uryasev, S. (2000). Optimization of Conditional Value-at-Risk. Journal of Risk, 2, 21-41. doi: http://dx.doi.org/10.21314/JOR.2000.038.
  • Rubinstein, M. (2002). Markowitz' Portfolio Selection: A Fifty-Year Retrospective. Journal of Finance, 57(3), 1041-1045. doi: http://dx.doi.org/10.1111/1540-6261.00453
  • Sklar, A. (1959). Fonctions de répartition à n dimensions et leurs marges, Publ. Inst. Statist. Univ. Paris, 8, 229-231.
  • Xiong, J.X, Idzorek, T.M., & Ibbotson, R.G. (2014). Volatility versus tail risk: Which one is compensated in equity funds? Journal of Portfolio Management, 40(2), 112-121.
Typ dokumentu
Bibliografia
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bwmeta1.element.ekon-element-000171459273

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