On the volatility of measures of financial risk: an investigation using returns from European markets
The statistical properties of various measures of risk were investigated with a view to explaining the reasons for lack of use in finance of risk measures other than the variance, and to see if there is a sensible measure to use for cross-European comparisons. As examples, the semi-variance, the lower partial moment, the Gini, and the absolute deviation were considered. A Monte Carlo study was conducted to study the behaviour of these measures of risk. Bootstrap methods were used by drawing random observations from real financial returns data, for the same purpose. Specifically, the equity indices from the following stock markets were used: Germany, United Kingdom, France, Italy, Holland and Belgium. It is concluded that there is little reason to reject measures of risk other than the variance based on a view that they are too volatile. Indeed the evidence shows that whilst the standard deviation may be the appropriate measure of risk for high volume markets (Germany, UK and France), it is not the most reliable risk measurement (in terms of volatility) when considering lower volume markets (Italy, Holland and Belgium). That is, the more non-normal the returns, the more likely is the standard deviation to be volatile compared to the Gini or the absolute deviation. Finally, optimized portfolios were investigated using different risk measures and substantial differences were found; this suggests these findings have practical consequences.
Volume (Year): 6 (2000)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/REJF20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/REJF20|
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.:
- Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
- Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-26, March.
- Hanoch, G & Levy, Haim, 1969. "The Efficiency Analysis of Choices Involving Risk," Review of Economic Studies, Wiley Blackwell, vol. 36(107), pages 335-46, July.
- Mossin, Jan, 1969. "Security Pricing and Investment Criteria in Competitive Markets," American Economic Review, American Economic Association, vol. 59(5), pages 749-56, December.
- William F. Sharpe, 1965. "Mutual Fund Performance," The Journal of Business, University of Chicago Press, vol. 39, pages 119.
- Bawa, Vijay S. & Lindenberg, Eric B., 1977. "Capital market equilibrium in a mean-lower partial moment framework," Journal of Financial Economics, Elsevier, vol. 5(2), pages 189-200, November.
- Stone, Bernell K, 1973. "A General Class of Three-Parameter Risk Measures," Journal of Finance, American Finance Association, vol. 28(3), pages 675-85, June.
- Sharpe, William F., 1967. "Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(02), pages 76-84, June.
When requesting a correction, please mention this item's handle: RePEc:taf:eurjfi:v:6:y:2000:i:1:p:18-38. 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: (Michael McNulty)
If references are entirely missing, you can add them using this form.