Spectral risk measures: properties and limitations

Kevin Dowd, John Cotter and Ghulam Sorwar

Centre for Financial Markets Working Papers from Research Repository, University College Dublin

Abstract: Spectral risk measures (SRMs) are risk measures that take account of user risk aversion, but to date there has been little guidance on the choice of utility function underlying them. This paper addresses this issue by examining alternative approaches based on exponential and power utility functions. A number of problems are identified with both types of spectral risk measure. The general lesson is that users of spectral risk measures must be careful to select utility functions that fit the features of the particular problems they are dealing with, and should be especially careful when using power SRMs.

Keywords: Coherent risk measures; Spectral risk measures; Exponential utility; Power utility; Risk--Econometric models; Utility theory--Mathematical models (search for similar items in EconPapers)
Date: 2008-04
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http://hdl.handle.net/10197/1190 First version, 2008 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:rru:cfmwps:10197/1190

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