Advanced Search
MyIDEAS: Login to save this paper or follow this series

On the Validity of Risk Measures over Time: Value-at-Risk, Conditional Tail Expectations and the Bodie-Merton-Perold Put

Contents:

Author Info

  • Jonathan Treussard

    ()
    (Department of Economics, Boston University)

Abstract

Over the past decade, risk measurement has received a much needed amount of attention from the .nancial community. Risk measures based on .xed quantiles un- der the actual probability distribution, especially Value-at-Risk and its re.nement the Conditional Tail Expectation, were instrumental in capturing the attention of .nancial decision-makers. However, these were developed in a way that is inconsistent with eco- nomic theory. Consequently, these instruments possess characteristics that make them invalid risk measures for the purposes they intend to serve, be it informing life-cycle investors or guaranteeing the .rm.s capital adequacy through regulation. In particular, in addition to failing to guarantee the intregity of .nancial .rms when used for capital adequacy, these measures can eventually decrease with the investment horizon. Risk-neutral .xed-quantile measures are valid for framing life-cycle decisions because of their economic content. When endowed with a dynamic replication technology, Q- measure .xed-quantile risk measures become least-cost insurance contracts that may be used for capital adequacy considerations. However, no single quantile of the risk-neutral distribution can be used for the procurement of risk capital at all horizons. A risk-neutral varying-quantile instrument is needed. This unique instrument is a put option proposed by Merton-Perold (1993) and Bodie (1995). The Bodie-Merton-Perold Put is universally valid for both risk disclosure to investors and for the regulatory provision of risk capital at all horizons. It is a natural candidate for an industry standard in risk measurement.

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2005-029.

as in new window
Length: 37 pages
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:bos:wpaper:wp2005-029

Contact details of provider:
Postal: 270 Bay State Road, Boston, MA 02215
Phone: 617-353-4389
Fax: 617-353-444
Web page: http://www.bu.edu/econ/
More information through EDIRC

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. Donald W.K. Andrews & C. John McDermott, 1993. "Nonlinear Econometric Models with Deterministically Trending Variables," Cowles Foundation Discussion Papers 1053, Cowles Foundation for Research in Economics, Yale University.
  3. Pierre Perron, 2005. "Dealing with Structural Breaks," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2005-017, Boston University - Department of Economics.
  4. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 57(6), pages 1361-1401, November.
  5. Perron, Pierre & Zhu, Xiaokang, 2005. "Structural breaks with deterministic and stochastic trends," Journal of Econometrics, Elsevier, Elsevier, vol. 129(1-2), pages 65-119.
  6. Phillips, P.C.B., 1986. "Testing for a Unit Root in Time Series Regression," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 8633, Universite de Montreal, Departement de sciences economiques.
  7. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(2), pages 139-162.
  8. Jushan Bai, 1997. "Estimation Of A Change Point In Multiple Regression Models," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 551-563, November.
  9. Kormendi, Roger C & Meguire, Philip, 1990. "A Multicountry Characterization of the Nonstationarity of Aggregate Output," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 22(1), pages 77-93, February.
  10. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
  11. Peter C.B. Phillips & Victor Solo, 1989. "Asymptotics for Linear Processes," Cowles Foundation Discussion Papers 932, Cowles Foundation for Research in Economics, Yale University.
  12. Bai, Jushan & Lumsdaine, Robin L & Stock, James H, 1998. "Testing for and Dating Common Breaks in Multivariate Time Series," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(3), pages 395-432, July.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bos:wpaper:wp2005-029. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Gillian Gurish).

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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