On dynamic measures of risk

Ioannis Karatzas () and Jaksa Cvitanic ()
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Ioannis Karatzas: Departments of Mathematics and Statistics, Columbia University, New York, NY 10027, USA Manuscript

Finance and Stochastics, 1999, vol. 3, issue 4, 482 pages

Abstract: In the context of complete financial markets, we study dynamic measures of the form \[ \rho(x;C):=\sup_{\nu\in\D} \inf_{\pi(\cdot)\in\A(x)}{\bf E}_\nu\left(\frac{C-X^{x, \pi}(T)}{S_0(T)}\right)^+, \] for the risk associated with hedging a given liability C at time t = T. Here x is the initial capital available at time t = 0, ${\cal A}(x)$ the class of admissible portfolio strategies, $S_0(\cdot)$ the price of the risk-free instrument in the market, ${\cal P}=\{{\bf P}_\nu\}_{\nu\in{\cal D}}$ a suitable family of probability measures, and [0,T] the temporal horizon during which all economic activity takes place. The classes ${\cal A}(x)$ and ${\cal D}$ are general enough to incorporate capital requirements, and uncertainty about the actual values of stock-appreciation rates, respectively. For this latter purpose we discuss, in addition to the above "max-min" approach, a related measure of risk in a "Bayesian" framework. Risk-measures of this type were introduced by Artzner, Delbaen, Eber and Heath in a static setting, and were shown to possess certain desirable "coherence" properties.

Keywords: Dynamic measures of risk; Bayesian risk; hedging; capital requirements; value-at-risk (search for similar items in EconPapers)
JEL-codes: C73 G11 G13 (search for similar items in EconPapers)
Date: 1999-08-20
Note: received: February 1998; final version received: February 1999
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Citations: View citations in EconPapers (43)

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