Risk Measurement and Management in a Crisis-Prone World

Woon Wong () and Laurence Copeland ()

No E2008/14, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: The current subprime crisis has prompted us to look again into the nature of risk at the tail of the distribution. In particular, we investigate the risk contribution of an asset, which has infrequent but huge losses, to a portfolio using two risk measures, namely Value-at-Risk (VaR) and Expected Shortfall (ES). While ES is found to measure the tail risk contribution effectively, VaR is consistent with intuition only if the underlying return distribution is well behaved. To facilitate the use of ES, we present a power function formula that can calculate accurately the critical values of the ES test statistic. This in turn enables us to derive a size-based multiplication factor for risk capital requirement.

Keywords: Value-at-Risk; expected shortfall; tail risk contribution; saddle point technique; risk capital (search for similar items in EconPapers)
JEL-codes: G11 G32 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2008-07
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://carbsecon.com/wp/E2008_14.pdf (application/pdf)

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:cdf:wpaper:2008/14

Access Statistics for this paper

More papers in Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section Contact information at EDIRC.
Bibliographic data for series maintained by Yongdeng Xu ().