Home  About us  Contact
 

Risk Measurement (risk + measurement)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Selected Abstracts

Operational Risk Measurement in Banking Institutions and Investment Firms: New European Evidences

FINANCIAL MARKETS, INSTITUTIONS & INSTRUMENTS, Issue 4 2008
Enrique Bonsón
The banking/investment sector must deal with a new variable, Operational Risk, for explaining various recent crises and bankruptcies. Operational Risk, which can be defined briefly as the risk generated by possible failures of a entity's Information Systems (IS), must be measured, covered, mitigated and managed by applying a series of methodologies, each of which assumes that the IS of the bank operates at a certain Stage of Sophistication. The present study proposes a scheme of evolution that details the stages of enhancement in the sophistication of their IS that banking entities may implement, so as to be capable of capturing, mitigating and managing Operational Risk. Using econometric methods, we create a proxy variable to capture the IS Sophistication of each entity. Then, the factor of entity size has been analyzed, and the country effect is explored. Additionally, the importance of intangible assets is weighted, among others entity aspects. The entity size has been revealed as the variable with most influence on the plans formulated in this respect by European entities, against other variables also considered in the present study, such as the country effect or the importance of intangible assets. The work shows how IS decisions referring to Operational Risk management are very influenced by size. It could introduce competition differences in the European banking system. [source]

The Impact of False Rejection Risk on Posterior Audit Risk Measurement

INTERNATIONAL JOURNAL OF AUDITING, Issue 1 2001
Anne D. Woodhead
This paper investigates false rejection risk, analysing the a priori relationship between the risk of false rejection and the more common risk of false acceptance, of an account balance by a substantive test. The paper uses probability theory to specify the relationship between these two risks and thus generate a model of posterior audit risk. The paper proceeds to investigate the relationship using the power function of basic statistics. This specifies the relationship between (i) the probability of rejecting the account balance and (ii) the size of the error which the balance contains. We argue that unless there is a discontinuity in the power function around the specified value of material error, then posterior audit risk will be unaffected by the substantive tests undertaken. Posterior risk will then be determined entirely by the assessed inherent and control risks. This conclusion is counter-intuitive to the approach to audit risk adopted by many professional pronouncements and results from the adoption of a mathematically rigorous definition of the risks encountered by the auditor. The primary conclusion is that the discontinuity arises under conditions of careful audit planning. If planning is careful, then false rejection risk contributes very little to posterior risk. In addition, there is very little difference between planned risk and posterior risk. [source]

A Generalized Extreme Value Approach to Financial Risk Measurement

JOURNAL OF MONEY, CREDIT AND BANKING, Issue 7 2007
TURAN G. BALI
financial risk management; value at risk; extreme value theory; skewed fat-tailed distributions This paper develops an unconditional and conditional extreme value approach to calculating value at risk (VaR), and shows that the maximum likely loss of financial institutions can be more accurately estimated using the statistical theory of extremes. The new approach is based on the distribution of extreme returns instead of the distribution of all returns and provides good predictions of catastrophic market risks. Both the in-sample and out-of-sample performance results indicate that the Box,Cox generalized extreme value distribution introduced in the paper performs surprisingly well in capturing both the rate of occurrence and the extent of extreme events in financial markets. The new approach yields more precise VaR estimates than the normal and skewed t distributions. [source]

Risk Measurement and Investment Myopia in Hedge Fund Management,

ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, Issue 1 2009
Xun Li
Abstract Lo (2001) surveys the literature on risk management for hedge funds, and recommends a dynamic and transparent risk measurement for the evolutionary hedge fund industry by citing Albert Einstein's comments. This study is to explore the feasibility and advantages of adopting a dynamic absolute-deviation risk measurement in hedge fund management. It does not only provide an optimal asset allocation strategy both analytically and numerically in a dynamic mean-absolute deviation (DMAD) setting for hedge fund managers, but also contributes to mitigation of potential investment myopia problems in their risk-taking behaviors. It sheds light on risk management and investor-fund manager agency conflicts in the hedge fund industry and adds to the literature on portfolio selection and optimal asset allocation. [source]

ON THE ROLE OF THE GROWTH OPTIMAL PORTFOLIO IN FINANCE

AUSTRALIAN ECONOMIC PAPERS, Issue 4 2005
Article first published online: 6 DEC 200, ECKHARD PLATEN
The paper discusses various roles that the growth optimal portfolio (GOP) plays in finance. For the case of a continuous market we show how the GOP can be interpreted as a fundamental building block in financial market modeling, portfolio optimisation, contingent claim pricing and risk measurement. On the basis of a portfolio selection theorem, optimal portfolios are derived. These allocate funds into the GOP and the savings account. A risk aversion coefficient is introduced, controlling the amount invested in the savings account, which allows to characterize portfolio strategies that maximise expected utilities. Natural conditions are formulated under which the GOP appears as the market portfolio. A derivation of the intertemporal capital asset pricing model is given without relying on Markovianity, equilibrium arguments or utility functions. Fair contingent claim pricing, with the GOP as numeraire portfolio, is shown to generalise risk neutral and actuarial pricing. Finally, the GOP is described in various ways as the best performing portfolio. [source]