Spectral Risk Measures: Properties and Limitations

27 Pages Posted: 6 Dec 2009

See all articles by Kevin Dowd

Kevin Dowd

Nottingham University Business School (NUBS)

John Cotter

University College Dublin; UCLA Anderson School of Management

Ghulam Sorwar

Nottingham University Business School

Date Written: April 18, 2008

Abstract

Spectral risk measures (SRMs) are risk measures that take account of user riskaversion, but to date there has been little guidance on the choice of utility function underlying them. This paper addresses this issue by examining alternative approaches based on exponential and power utility functions. A number of problems are identified with both types of spectral risk measure. The general lesson is that users of spectral risk measures must be careful to select utility functions that fit the features of the particular problems they are dealing with, and should be especially careful when using power SRMs.

Keywords: coherent risk measures, spectral risk measures, exponential utility

JEL Classification: G15

Suggested Citation

Dowd, Kevin and Cotter, John and Sorwar, Ghulam, Spectral Risk Measures: Properties and Limitations (April 18, 2008). Available at SSRN: https://ssrn.com/abstract=1517148 or http://dx.doi.org/10.2139/ssrn.1517148

Kevin Dowd

Nottingham University Business School (NUBS) ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

John Cotter (Contact Author)

University College Dublin ( email )

School of Business, Carysfort Avenue
Blackrock, Co. Dublin
Ireland
353 1 716 8900 (Phone)
353 1 283 5482 (Fax)

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/professorjohncotter/

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Ghulam Sorwar

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

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