 Measuring and modelling riskGlobal Business and Economics Review, 2009, vol. 11, issue 3/4, 199-224 Abstract: This paper will examine some commonly adopted approaches to the measurement of risk in finance and the various shortcomings implicit in the underpinnings of these approaches: early views on the nature of risk and uncertainty (Hume, Bernoulli, Knight, Keynes and Ramsey); the adoption of a mean variance decision choice criteria as a central foundation in financial economics and its accompanying limitations; the various approaches in financial econometrics to modelling volatility (ARCH, GARCH, stochastic volatility, realised volatility and attempts to capture 'tail risk'); the measurement of risk implicit in applications of option pricing models and implied volatility (in particular the VIX index); the Basel Agreements and convention of modelling risk in a value at risk (VaR) framework; and the attractions of conditional value at risk (CVaR) as an alternative metric. I shall conclude with a consideration of the shortcomings of these various approaches when faced with a system wide shock as recently experienced in the global financial crisis. Keywords: risk measurement; mean-variance risk analysis; financial econometrics; conditional VaR; CVaR; risk modelling; financial risk; value at risk; financial crisis; option pricing models; volatility. (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ids:gbusec:v:11:y:2009:i:3/4:p:199-224 Access Statistics for this article More articles in Global Business and Economics Review from Inderscience Enterprises Ltd |
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