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Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements

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  • Kevin Dowd

    (The University of Nottingham, UK)

  • John Cotter

    (University College Dublin, Ireland)

Abstract

Spectral risk measures are attractive risk measures as they allow the user to obtain risk measures that reflect their risk-aversion functions. To date there has been very little guidance on the choice of risk-aversion functions underlying spectral risk measures. This paper addresses this issue by examining two popular risk aversion functions, based on exponential and power utility functions respectively. We find that the former yields spectral risk measures with nice intuitive properties, but the latter yields spectral risk measures that can have perverse properties. More work therefore needs to be done before we can be sure that arbitrary but respectable utility functions will always yield ‘well-behaved’ spectral risk measures.

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Bibliographic Info

Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 200742.

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Length: 18 pages
Date of creation: 24 Jun 2011
Date of revision:
Handle: RePEc:ucd:wpaper:2007/42

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Keywords: coherent risk measures; spectral risk measures; risk aversion functions;

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  5. Cotter, JOhn & Dowd, Kevin, 2006. "Extreme Spectral Risk Measures: An Application to Futures Clearinghouse Margin Requirements," MPRA Paper 3505, University Library of Munich, Germany.
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