28 Pages Posted: 9 Nov 2016 Last revised: 18 Nov 2016
Date Written: October 26, 2016
Monetary risk measures are usually interpreted as the smallest amount of external capital that must be added to a financial position to make it acceptable. We propose a new concept: intrinsic risk measures and argue that this approach provides a direct path from unacceptable positions towards the acceptance set. Intrinsic risk measures use only internal resources and return the smallest percentage of the currently held financial position which has to be sold and reinvested into an eligible asset such that the resulting position becomes acceptable. While avoiding the problem of infinite values, intrinsic risk measures allow a free choice of the eligible asset and they preserve desired properties such as monotonicity and quasi-convexity. A dual representation on convex acceptance sets is derived and the link of intrinsic risk measures to their monetary counterparts on cones is detailed.
Keywords: intrinsic risk measures, monetary risk measures, acceptance sets, coherence, conicity, quasi-convexity, value at risk
JEL Classification: C60, G11, G20
Suggested Citation: Suggested Citation
Farkas, Walter and Smirnow, Alexander, Intrinsic Risk Measures (October 26, 2016). Swiss Finance Institute Research Paper No. 16-65. Available at SSRN: https://ssrn.com/abstract=2866406 or http://dx.doi.org/10.2139/ssrn.2866406