Defining and measuring business risk in an economic‐capital framework

René Doff

Journal of Risk Finance, 2008, vol. 9, issue 4, 317-333

Abstract: Purpose - The objectives of this paper are to: define business risk; identify whether economic capital could be used to mitigate this risk; and investigate business‐risk measurement methodologies. Design/methodology/approach - The paper analyzes definitions used in theory and practice and derived a definition. It analyzes three measurement methodologies: analogue companies/peer group analysis, statistical methods, and scenario analysis. These methodologies are tested against the criteria of effective management control, because economic capital is increasingly used as a management control instrument. Findings - Economic capital can be used as business‐risk mitigant albeit not the only one. The measurement methodology of scenario analysis satisfies most of the criteria for effective control. Practical implications - This paper opens a discussion to further develop the scenario approach in theory and practice. Originality/value - Despite the amount of economic capital that financial institutions hold to cover business risk, it has received little attention in literature. This paper opens a discussion on a relatively new field of research.

Keywords: Risk management; Capital; Risk analysis; Banks (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:15265940810894990

DOI: 10.1108/15265940810894990

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