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Financial Risk Measurement for Financial Risk Management

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Author Info

  • Torben G. Andersen

    ()
    (Northwestern University and CREATES)

  • Tim Bollerslev

    ()
    (Duke University and CREATES)

  • Peter F. Christoffersen

    ()
    (University of Toronto and CREATES)

  • Francis X. Diebold

    ()
    (University of Pennsylvania)

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.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2011-37.

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Length: 129
Date of creation: 02 Nov 2011
Date of revision:
Handle: RePEc:aah:create:2011-37

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Web page: http://www.econ.au.dk/afn/

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Keywords: Risk measurement; risk management; volatility; conditionality; dimensionality reduction; high-frequency data; macro fundamentals;

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Cited by:
  1. Dias, Alexandra, 2013. "Market capitalization and Value-at-Risk," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5248-5260.

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