Financial Risk Measurement for Financial Risk Management

Torben Andersen, Tim Bollerslev, Peter Christoffersen and Francis Diebold

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: Current practice largely follows restrictive approaches to market risk measurement, such as historical simulation or RiskMetrics. In contrast, we propose exible methods that exploit recent developments in nancial econometrics and are likely to produce more accurate risk assessments, treating both portfoliolevel and asset-level analysis. Asset-level analysis is particularly challenging because the demands of real-world risk management in nancial institutions - in particular, real-time risk tracking in very high-dimensional situations - impose strict limits on model complexity. Hence we stress powerful yet parsimonious models that are easily estimated. In addition, we emphasize the need for deeper understanding of the links between market risk and macroeconomic fundamentals, focusing primarily on links among equity return volatilities, real growth, and real growth volatilities. Throughout, we strive not only to deepen our scientic understanding of market risk, but also cross-fertilize the academic and practitioner communities, promoting improved market risk measurement technologies that draw on the best of both.

Keywords: Risk measurement; risk management; volatility; conditionality; dimensionality reduction; high-frequency data; macro fundamentals (search for similar items in EconPapers)
JEL-codes: C22 C32 C58 G32 (search for similar items in EconPapers)
Pages: 129
Date: 2011-11-02
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Chapter: Financial Risk Measurement for Financial Risk Management (2013)
Working Paper: Financial Risk Measurement for Financial Risk Management (2012)
Working Paper: Financial Risk Measurement for Financial Risk Management (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2011-37

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