Consistency of Risk Measure Estimates

14 Pages Posted: 19 Oct 2013

Date Written: October 18, 2013

Abstract

Recently there has been renewed debate about the relative merits of VaR and CVaR as measures of financial risk. VaR is not coherent and does not quantify the risk beyond VaR, while CVaR shows some computational instabilities and is not 'elicitable' (Gneiting 2010, Ziegel 2013). It is argued in this paper that such questions are best addressed from the point of view of probability forecasting or Dawid's 'prequential statistics.' We introduce a concept of 'consistency' of a risk measure, which is close to Dawid's 'strong prequential principle,' and show that VaR indeed has special properties not shared by any other risk measure.

Keywords: Value at risk, conditional value at risk, quantile estimation, prequential statistics, risk management, consistent estimates

JEL Classification: C13, C32, C44, C53, G17

Suggested Citation

Davis, Mark, Consistency of Risk Measure Estimates (October 18, 2013). Available at SSRN: https://ssrn.com/abstract=2342279 or http://dx.doi.org/10.2139/ssrn.2342279

Mark Davis (Contact Author)

Imperial College London ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom
02075948486 (Phone)

HOME PAGE: http://www.ma.ic.ac.uk/~mdavis

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