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The Present, Future and Imperfect of Financial Risk Management

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  • Carol Alexandra

    (ICMA Centre, University of Reading)

Abstract

Current research on financial risk management applications of econometrics centres on the accurate assessment of individual market and credit risks with relatively little theoretical or applied econometric research on other types of risk, aggregation risk, data incompleteness and optimal risk control. We argue that consideration of the model risk arising from crude aggregation rules and inadequate data could lead to a new class of reduced form Bayesian risk assessment models. Logically, these models should be set within a common factor framework that allows proper risk aggregation methods to be developed. We explain how such a framework could also provide the essential links between risk control, risk assessments and the optimal allocation of resources.

Suggested Citation

  • Carol Alexandra, 2003. "The Present, Future and Imperfect of Financial Risk Management," ICMA Centre Discussion Papers in Finance icma-dp2003-12, Henley Business School, University of Reading, revised Feb 2004.
    • Handle: RePEc:rdg:icmadp:icma-dp2003-12
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    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2003-12.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial risk assessment; risk control; RAROC; economic capital; regulatory capital; optimal allocation of resources;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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