Value-at-Risk: Implementing a Risk Measurement Standard

96-47

34 Pages Posted: 1 Feb 1997

See all articles by Christopher Marshall

Christopher Marshall

EDHEC Risk; SunGard

Michael Siegel

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: June 1996

Abstract

In the wake of recent failures of risk management, there has been a widespread call for improved quantification of the financial risks facing firms. At the forefront of this clamor has been Value at Risk. Previous research has identified differences in models, or Model Risk, as an important impediment to developing a Value at Risk standard. By contrast, this paper considers the divergence in a model's implementation in software and how it too, affects the establishment of a risk measurement standard. Different leading risk management systems' vendors were given identical portfolios of instruments of varying complexity, and were asked to assess the value at risk according to one common model, J.P. Morgan's RiskMetrics. We analyzed the VaR results on a case by case basis, and in terms of prior expectations from the structure of financial instruments in the portfolio, as well as prior vendor expectations about the relative complexity of different asset classes. It follows that this research indicates the extent to which one particular model of risk can be effectively specified in advance, independent of the model's detailed implementation and use in practice.

JEL Classification: D81

Suggested Citation

Marshall, Christopher and Siegel, Michael, Value-at-Risk: Implementing a Risk Measurement Standard (June 1996). 96-47. Available at SSRN: https://ssrn.com/abstract=1212 or http://dx.doi.org/10.2139/ssrn.1212

Christopher Marshall

EDHEC Risk ( email )

58 rue du Port
Lille, 59046
France

SunGard ( email )

11 Salt Creek Lane
Hinsdale, IL 60521
United States

Michael Siegel (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E53-323
Cambridge, MA 02142
United States
617-253-2937 (Phone)
617-258-7579 (Fax)

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