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Extreme Risk Management

Lisa R. Goldberg

University of California, Berkeley; Aperio Group

Michael Y. Hayes


Jose Menchero

MSCI Barra

Indrajit Mitra

University of Michigan, Stephen M. Ross School of Business

February 17, 2009

MSCI Barra Research Paper No. 2009-4

Quantitative risk management relies on a constellation of tools that are used to analyze portfolio risk. We develop the standard toolkit, which includes betas, risk budgets and correlations, in a general, coherent, mnemonic framework centered around marginal risk contributions. We apply these tools to generate side-by-side analyses of volatility and expected shortfall, which is a measure of average portfolio excess of value-at-risk. We focus on two examples whose importance is highlighted by the current economic crisis. By examining downside protection provided by an out-of-the-money put option we show that the diversification benefit of the option is greater for a risk measure that is more highly concentrated in the tail of the distribution. By comparing two-asset portfolios that are distinguished only by the likelihood of coincident extreme events, we show that expected shortfall measures market contagion in a way that volatility cannot.

Number of Pages in PDF File: 16

Keywords: risk management, quantitative extreme

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Date posted: February 12, 2009 ; Last revised: February 19, 2009

Suggested Citation

Goldberg, Lisa R. and Hayes, Michael Y. and Menchero, Jose and Mitra, Indrajit, Extreme Risk Management (February 17, 2009). MSCI Barra Research Paper No. 2009-4. Available at SSRN: https://ssrn.com/abstract=1341363 or http://dx.doi.org/10.2139/ssrn.1341363

Contact Information

Lisa R. Goldberg (Contact Author)
University of California, Berkeley ( email )
Department of Statistics
367 Evans Hall
Berkeley, CA 94720-3860
United States
Aperio Group ( email )
3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States
Michael Y. Hayes
MSCI Inc. ( email )
2100 Milvia St.
Berkeley, CA 94704
United States
Jose Menchero
MSCI Barra ( email )
555 California Street, Suite 1400
San Francisco, CA 94104
United States
Indrajit Mitra
University of Michigan, Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States

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