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On the necessity of five risk measures

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  • Dominique Guegan

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Wayne Tarrant

    ()
    (Wingate University - Department of Mathematics)

Abstract

The banking systems that deal with risk management depend on underlying risk measures. Following the recommendation of the Basel II accord, most banks have developed internal models to determine their capital requirement. The Value at Risk measure plays an important role in computing this capital. In this paper we analyze in detail the errors produced by use of this measure. We then discuss other measures, pointing out their strengths and shortcomings. We give detailed examples, showing the need for five risk measures in order to compute a capital in relation to the risk to which the bank is exposed. In the end, we suggest using five different risk measures for computing capital requirements.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00460901.

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Date of creation: Jan 2010
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Handle: RePEc:hal:cesptp:halshs-00460901

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Keywords: Risk measure ; Value at Risk ; Bank capital ; Basel II Accord;

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References

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  1. Rockafellar, R. Tyrrell & Uryasev, Stanislav, 2002. "Conditional value-at-risk for general loss distributions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 26(7), pages 1443-1471, July.
  2. Yamai, Yasuhiro & Yoshiba, Toshinao, 2002. "Comparative Analyses of Expected Shortfall and Value-at-Risk (3): Their Validity under Market Stress," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(3), pages 181-237, October.
  3. repec:hal:journl:halshs-00375765 is not listed on IDEAS
  4. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, American Finance Association, vol. 7(1), pages 77-91, 03.
  5. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 36, pages 394.
  6. Cyril Caillault & Dominique Guegan, 2009. "Forecasting VaR and Expected Shortfall using Dynamical Systems: A Risk Management Strategy," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers), HAL halshs-00375765, HAL.
  7. René M. Stulz, 1996. "Rethinking Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 9(3), pages 8-25.
  8. repec:hal:journl:halshs-00443846 is not listed on IDEAS
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Cited by:
  1. Maria Th. Kasselaki & Athanasios O. Tagkalakis, 2013. "Financial soundness indicators and financial crisis episodes," Working Papers, Bank of Greece 158, Bank of Greece.

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