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Value at Risk as a Diagnostic Tool for Corporates: The Airline Industry


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  • Winfried Hallerbach

    (Erasmus University Rotterdam)

  • Bert Menkveld

    (Erasmus University Rotterdam and KLM Schiphol)


In recent years the Value at Risk (VaR) concept for measuringdownside risk has been widelystudied. VaR basically is a summary statistic that quantifies theexposure of an asset or portfolio tomarket risk, or the risk that a position declines in value withadverse market price changes. Threeparties have been particularly interested: financial institutions,regulators and corporates. In this paper, we focus on VaR use for corporates. This field isrelatively unexplored. We showhow VaR can be helpful to study market value risk -- proxied by shareprice risk. We develop amethodology to decompose the overall VaR into components that areattributable to underlyingexternal risk factors and a residual idiosyncratic component.Apart from developing theoretical results, we study the airlineindustry to show what practicalresults our 'Component VaR framework' can yield. Like anymultinational company, an airlinefaces significant exposures to external risk factors, e.g. commodityprices, interest rates andexchange rates. In our opinion, Component VaR analysis can enrichdiscussions in the company onfinancial risk management and shareholder value.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 99-023/2.

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Date of creation: 19 Mar 1999
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Handle: RePEc:dgr:uvatin:19990023

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  1. Jorion, Philippe, 1990. "The Exchange-Rate Exposure of U.S. Multinationals," The Journal of Business, University of Chicago Press, vol. 63(3), pages 331-45, July.
  2. Sweeney, Richard J & Warga, Arthur D, 1986. "The Possibility of Estimating Risk Premia in Asset Pricing Models," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 21(2), pages 299-308, May.
  3. René M. Stulz, 1996. "Rethinking Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 8-25.
  4. Jorion, Philippe, 1995. " Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, American Finance Association, vol. 50(2), pages 507-28, June.
  5. Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, American Finance Association, vol. 39(4), pages 1141-53, September.
  6. Christopher L. Culp & Merton H. Miller & Andrea M. P. Neves, 1998. "Value At Risk: Uses And Abuses," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(4), pages 26-38.
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