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Analysing Perceived Downside Risk: the Component Value-at-Risk Framework

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  • Winfried G. Hallerbach
  • Albert J. Menkveld

Abstract

"Multinational companies face increasing risks arising from external risk factors, e.g. exchange rates, interest rates and commodity prices, which they have learned to hedge using derivatives. However, despite increasing disclosure requirements, a firm's net risk profile may not be transparent to shareholders. We develop the 'Component Value-at-Risk (VaR)' framework for companies to identify the multi-dimensional downside risk profile as perceived by shareholders. This framework allows for decomposing downside risk into components that are attributable to each of the underlying risk factors. The firm can compare this perceived VaR, including its composition and dynamics, to an internal VaR based on net exposures as it is known to the company. Any differences may lead to surprises at times of earnings announcements and thus constitute a litigation threat to the firm. It may reduce this information asymmetry through targeted communication efforts." Copyright Blackwell Publishers Ltd, 2004.

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Bibliographic Info

Article provided by European Financial Management Association in its journal European Financial Management.

Volume (Year): 10 (2004)
Issue (Month): 4 ()
Pages: 567-591

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Handle: RePEc:bla:eufman:v:10:y:2004:i:4:p:567-591

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Cited by:
  1. Hu, Xiangling & Motwani, Jaideep G., 2014. "Minimizing downside risks for global sourcing under price-sensitive stochastic demand, exchange rate uncertainties, and supplier capacity constraints," International Journal of Production Economics, Elsevier, vol. 147(PB), pages 398-409.

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