Intrinsic Risk Measures

19 Pages Posted: 9 Nov 2016 Last revised: 16 Jan 2018

See all articles by Walter Farkas

Walter Farkas

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; ETH Zurich

Alexander Smirnow

University of Zurich - Department of Banking and Finance; ETH Zürich - Department of Mathematics

Date Written: December 2017

Abstract

Monetary risk measures classify a financial position by the minimal amount of external capital that must be added to the position to make it acceptable.

We propose a new concept: intrinsic risk measures. The definition via external capital is avoided and only internal resources appear. An intrinsic risk measure is defined by the smallest percentage of the currently held financial position which has to be sold and reinvested in an eligible asset such that the resulting position becomes acceptable.

We show that this approach requires less nominal investment in the eligible asset to reach acceptability. It provides a more direct path from unacceptable positions towards the acceptance set and implements desired properties such as monotonicity and quasi-convexity solely through the structure of the acceptance set. We derive a representation on cones and a dual representation on convex acceptance sets and we detail the connections of intrinsic risk measures to their monetary counterparts.

Keywords: intrinsic risk measures, monetary risk measures, acceptance sets, coherence, conicity, quasi-convexity, value at risk

JEL Classification: C60, G11, G20

Suggested Citation

Farkas, Walter and Smirnow, Alexander, Intrinsic Risk Measures (December 2017). 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

Walter Farkas (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland
+41-44-634 3953 (Phone)
+41-44-634 4345 (Fax)

HOME PAGE: http://https://people.math.ethz.ch/~farkas/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

ETH Zurich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

Alexander Smirnow

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

ETH Zürich - Department of Mathematics ( email )

ETH Zentrum HG-F 42.1
Raemistr. 101
CH-8092 Zurich, 8092
Switzerland

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