Risk Measurement and Management in a Crisis-Prone World

26 Pages Posted: 11 Sep 2008

See all articles by Woon K. Wong

Woon K. Wong

IMRU, Cardiff Business School

Laurence Copeland

Cardiff University - Cardiff Business School

Date Written: July 1, 2008

Abstract

The current subprime crisis has prompted us to look again into the nature of risk at the tail of the distribution. In particular, we investigate the risk contribution of an asset, which has infrequent but huge losses, to a portfolio using two risk measures, namely Value-at-Risk (VaR) and Expected Shortfall (ES). While ES is found to measure the tail risk contribution effectively, VaR is consistent with intuition only if the underlying return distribution is well behaved. To facilitate the use of ES, we present a power function formula that can calculate accurately the critical values of the ES test statistic. This in turn enables us to derive a size-based multiplication factor for risk capital requirement.

Keywords: Value-at-Risk, expected shortfall, tail risk contribution, saddlepoint technique, risk capital

JEL Classification: G11, G32

Suggested Citation

Wong, Woon K. and Copeland, Laurence S., Risk Measurement and Management in a Crisis-Prone World (July 1, 2008). Available at SSRN: https://ssrn.com/abstract=1265285 or http://dx.doi.org/10.2139/ssrn.1265285

Woon K. Wong (Contact Author)

IMRU, Cardiff Business School ( email )

Cardiff CF10 3EU
United Kingdom

Laurence S. Copeland

Cardiff University - Cardiff Business School ( email )

Aberconway Building
Colum Drive
Cardiff, CF10 3EU
United Kingdom
+44 29 20875740 (Phone)
+44 29 20874419 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
204
Abstract Views
1,025
rank
152,390
PlumX Metrics