Robustness and sensitivity analysis of risk measurement procedures

Rama Cont, Romain Deguest and Giacomo Scandolo ()

Quantitative Finance, 2010, vol. 10, issue 6, 593-606

Abstract: Measuring the risk of a financial portfolio involves two steps: estimating the loss distribution of the portfolio from available observations and computing a 'risk measure' that summarizes the risk of the portfolio. We define the notion of 'risk measurement procedure', which includes both of these steps, and introduce a rigorous framework for studying the robustness of risk measurement procedures and their sensitivity to changes in the data set. Our results point to a conflict between the subadditivity and robustness of risk measurement procedures and show that the same risk measure may exhibit quite different sensitivities depending on the estimation procedure used. Our results illustrate, in particular, that using recently proposed risk measures such as CVaR/expected shortfall leads to a less robust risk measurement procedure than historical Value-at-Risk. We also propose alternative risk measurement procedures that possess the robustness property.

Keywords: Risk management; Risk measurement; Coherent risk measures; Law invariant risk measures; Value-at-Risk; Expected shortfall (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (197)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/14697681003685597 (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:taf:quantf:v:10:y:2010:i:6:p:593-606

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RQUF20

DOI: 10.1080/14697681003685597

Access Statistics for this article

Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral

More articles in Quantitative Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().