IDEAS home Printed from https://ideas.repec.org/a/bla/eufman/v10y2004i4p567-591.html
   My bibliography  Save this article

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

Author

Listed:
  • 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.

Suggested Citation

  • Winfried G. Hallerbach & Albert J. Menkveld, 2004. "Analysing Perceived Downside Risk: the Component Value‐at‐Risk Framework," European Financial Management, European Financial Management Association, vol. 10(4), pages 567-591, December.
    • Handle: RePEc:bla:eufman:v:10:y:2004:i:4:p:567-591
    DOI: 10.1111/j.1354-7798.2004.00266.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1354-7798.2004.00266.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1354-7798.2004.00266.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Matthew Pritsker, 2001. "The hidden dangers of historical simulation," Finance and Economics Discussion Series 2001-27, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yingying Kang & Rajan Batta & Changhyun Kwon, 2014. "Value-at-Risk model for hazardous material transportation," Annals of Operations Research, Springer, vol. 222(1), pages 361-387, November.
    2. Andrés García Mirantes & Javier Población & Gregorio Serna, 2012. "The Stochastic Seasonal Behaviour of Natural Gas Prices," European Financial Management, European Financial Management Association, vol. 18(3), pages 410-443, June.
    3. 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.
    4. Wei Sun & Svetlozar Rachev & Frank J. Fabozzi, 2009. "A New Approach for Using Lévy Processes for Determining High‐Frequency Value‐at‐Risk Predictions," European Financial Management, European Financial Management Association, vol. 15(2), pages 340-361, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rostagno, Luciano Martin, 2005. "Empirical tests of parametric and non-parametric Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR) measures for the Brazilian stock market index," ISU General Staff Papers 2005010108000021878, Iowa State University, Department of Economics.
    2. Torben G. Andersen & Tim Bollerslev & Peter Christoffersen & Francis X. Diebold, 2007. "Practical Volatility and Correlation Modeling for Financial Market Risk Management," NBER Chapters, in: The Risks of Financial Institutions, pages 513-544, National Bureau of Economic Research, Inc.
    3. Gaglianone, Wagner Piazza & Lima, Luiz Renato & Linton, Oliver & Smith, Daniel R., 2011. "Evaluating Value-at-Risk Models via Quantile Regression," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(1), pages 150-160.
    4. Jian Zhou, 2012. "Extreme risk measures for REITs: a comparison among alternative methods," Applied Financial Economics, Taylor & Francis Journals, vol. 22(2), pages 113-126, January.
    5. Zhou, Jian, 2014. "Modeling conditional covariance for mixed-asset portfolios," Economic Modelling, Elsevier, vol. 40(C), pages 242-249.
    6. Ryohei Kawata & Masaaki Kijima, 2007. "Value-at-risk in a market subject to regime switching," Quantitative Finance, Taylor & Francis Journals, vol. 7(6), pages 609-619.
    7. Peter Christoffersen & Silvia Gonçalves, 2004. "Estimation Risk in Financial Risk Management," CIRANO Working Papers 2004s-15, CIRANO.
    8. Scheicher, Martin & Raunig, Burkhard, 2008. "A value at risk analysis of cedit default swaps," Working Paper Series 968, European Central Bank.
    9. Jian Zhou & Randy Anderson, 2012. "Extreme Risk Measures for International REIT Markets," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 152-170, June.
    10. Dionne, Georges & Duchesne, Pierre & Pacurar, Maria, 2009. "Intraday Value at Risk (IVaR) using tick-by-tick data with application to the Toronto Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 16(5), pages 777-792, December.
    11. Michael S. Gibson, 2001. "Incorporating event risk into value-at-risk," Finance and Economics Discussion Series 2001-17, Board of Governors of the Federal Reserve System (U.S.).
    12. Peter Christoffersen, 2004. "Backtesting Value-at-Risk: A Duration-Based Approach," Journal of Financial Econometrics, Oxford University Press, vol. 2(1), pages 84-108.
    13. Rossignolo, Adrian F. & Fethi, Meryem Duygun & Shaban, Mohamed, 2012. "Value-at-Risk models and Basel capital charges," Journal of Financial Stability, Elsevier, vol. 8(4), pages 303-319.
    14. Christophe HURLIN & Sessi TOKPAVI, 2007. "Une évaluation des procédures de Backtesting," LEO Working Papers / DR LEO 1716, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    15. Rossignolo, Adrián F. & Fethi, Meryem Duygun & Shaban, Mohamed, 2013. "Market crises and Basel capital requirements: Could Basel III have been different? Evidence from Portugal, Ireland, Greece and Spain (PIGS)," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1323-1339.
    16. Adrián F. Rossignolo & Víctor A. Álvarez, 2015. "Has the Basel Committee Got it Right? Evidence from Commodity Positions in Turmoil," Remef - Revista Mexicana de Economía y Finanzas Nueva Época REMEF (The Mexican Journal of Economics and Finance), Instituto Mexicano de Ejecutivos de Finanzas, IMEF, vol. 10(1), pages 1-38, Enero-Jun.
    17. Ramona Rupeika-Apoga & Roberts Nedovis, 2016. "The Foreign Exchange Exposure of Domestic Companies in Eurozone: Case of the Baltic States," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 165-178.
    18. Kubitza, Christian & Gründl, Helmut, 2016. "Systemic risk: Time-lags and persistence," ICIR Working Paper Series 20/16, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    19. Pritsker, Matthew, 2006. "The hidden dangers of historical simulation," Journal of Banking & Finance, Elsevier, vol. 30(2), pages 561-582, February.
    20. Sean D. Campbell, 2005. "A review of backtesting and backtesting procedures," Finance and Economics Discussion Series 2005-21, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:eufman:v:10:y:2004:i:4:p:567-591. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efmaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.