A framework for assessing comprehensive income risk exposure over varying time horizons

James Cataldo ()

Review of Quantitative Finance and Accounting, 2015, vol. 45, issue 4, 819-844

Abstract: This paper develops a novel, intertemporal approach to assessing comprehensive income risk exposure. While a large body of accounting and policy literature focuses on quality and reliability attributes, the present study employs the premise that fair value and comprehensive income are perfectly measured at all times. In this framework, the context-sensitive impacts of comprehensive income volatility stem from the structure and dynamics of the value generation process rather than variations in measurement quality. These impacts occur concurrently with measurement related effects, but are treated as conceptually distinct. The results illustrate how factors such as risk horizon, trading frequency, and portfolio composition can affect the severity of risk exposure over time. Applied to patterns of unrealized fair-value changes in US bank available-for-sale portfolios, the model significantly improves on the most widely accepted convention for multiperiod risk aggregation (the so-called square-root-of-time or “sqrt(t)” rule). The proposed approach has direct application to value-at-risk and stress-test methods estimates that use horizon-dependent volatilities as inputs. From a financial reporting standpoint, the proposed framework affirms the utility of the “mixed measurement” accounting model and supports multifaceted or “dual presentation” approaches to financial statements. Copyright Springer Science+Business Media New York 2015

Keywords: Risk assessment; Comprehensive income; Fair value; Simulation; M410; M480; G210; G170 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1007/s11156-014-0457-1 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:45:y:2015:i:4:p:819-844

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-014-0457-1

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().