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A risk-based risk finance paradigm

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Abstract

We propose an alternative to the conventional risk finance paradigm of enterprise risk management that accounts for not only a loss portfolio’s expected frequency and expected severity, but also its “risk” as captured by an appropriate measure of dispersion/spread. This new paradigm is based upon four distinct properties of a loss portfolio that enhance the benefits of diversification: (1) a high expected frequency; and (2) less-than-perfect positive correlations between individual severities; (3) light-tailed severities; and (4) a predictable (i.e. non-erratic) frequency.

Suggested Citation

  • Gao, Siwei & Powers, Michael R. & Chapman, Zaneta A., 2012. "A risk-based risk finance paradigm," Journal of Financial Transformation, Capco Institute, vol. 35, pages 173-178.
    • Handle: RePEc:ris:jofitr:1537
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    Cited by:

    1. Michael R. Powers & Thomas Y. Powers & Siwei Gao, 2012. "Risk Finance for Catastrophe Losses with Pareto‐Calibrated Lévy‐Stable Severities," Risk Analysis, John Wiley & Sons, vol. 32(11), pages 1967-1977, November.

    More about this item

    Keywords

    risk finance paradigm; enterprise risk; enterprise risk management; loss portfolio; ERM;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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