Measuring & Managing Financial Risks with Improved Alternatives Beyond Value-at-Risk (VaR)

29 Pages Posted: 17 Apr 2015

See all articles by Yogesh Malhotra

Yogesh Malhotra

Global Risk Management Network, LLC

Date Written: January 26, 2012

Abstract

[Update: Within four weeks of the original publication of this research report, Risk Magazine reported in its 28th February 2012 issue story titled 'Goodbye VaR? Basel to Consider Other Risk Metrics': "A review of trading book capital rules, due to be launched in March by the Basel Committee on Banking Supervision, will consider ditching value-at-risk as the main measure on which market risk capital is calculated, sources say - but it may not be easy to find a replacement." Subsequently, in May 2012, Bank for International Settlements (BIS) published Basel Committee's 'Fundamental review of the trading book - consultative document' proposing the switch from Value-at-Risk (VaR) to Expected Shortfall in order to better capture 'tail risk.']

Based upon a literature survey of research on Value-at-Risk (VaR), the predominant measure of financial risk assessment in the global Banking and Finance industry, this presentation outlines the case for advancing beyond VaR for better measurement of systemic financial risks. Specifying why alternatives to VaR are necessary given known inherent limitations of VaR as a measure of systemic risks, it also examines if in years preceding the Financial Crisis, specific limitations of VaR observed in course of the Crisis were foreseen by other researchers. Establishing the need for better measures of systemic risks beyond VaR, based upon a survey of the spectral risk measures, it reviews alternative models and measures from extant research and empirical research on their comparative analysis.

Keywords: VaR, Value-at-Risk, Credit Risk, Liquidity Risk, Market Risk, Operational Risk, Systemic Risk, VaR Regulation, Coherent Risk Measures, Expected Shortfall, Spectral Risk Measures, Co-VaR, CaViaR

JEL Classification: B23, C1, C10, C12, C13, C14, C15, C19, C22, C32, C4, C5, C51, C52

Suggested Citation

Malhotra, Yogesh, Measuring & Managing Financial Risks with Improved Alternatives Beyond Value-at-Risk (VaR) (January 26, 2012). Available at SSRN: https://ssrn.com/abstract=2594859 or http://dx.doi.org/10.2139/ssrn.2594859

Yogesh Malhotra (Contact Author)

Global Risk Management Network, LLC ( email )

Cornell Business and Technology Park
Ithaca, NY 14852-4892
United States

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