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

Author

Listed:
  • 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.

Suggested Citation

  • Kevin Dowd & John Cotter, 2011. "Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements," Working Papers 200742, Geary Institute, University College Dublin.
  • Handle: RePEc:ucd:wpaper:2007/42
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    References listed on IDEAS

    as
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    5. Cotter, John, 2007. "Varying the VaR for unconditional and conditional environments," Journal of International Money and Finance, Elsevier, vol. 26(8), pages 1338-1354, December.
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    14. Theodore E. Day, 2004. "Margin Adequacy and Standards: An Analysis of the Crude Oil Futures Market," The Journal of Business, University of Chicago Press, vol. 77(1), pages 101-136, January.
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    Cited by:

    1. Robert A. Jones & Christophe Pérignon, 2013. "Derivatives Clearing, Default Risk, and Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 373-400, June.
    2. Takashi Kato, 2017. "Asymptotic Analysis for Spectral Risk Measures Parameterized by Confidence Level," Papers 1711.07335, arXiv.org.

    More about this item

    Keywords

    coherent risk measures; spectral risk measures; risk aversion functions;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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