The Temporal Dimension of Risk

27 Pages Posted: 13 Dec 2016

See all articles by Ola Mahmoud

Ola Mahmoud

University of St. Gallen; University of California at Berkeley; Swiss Finance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: December 12, 2016

Abstract

Multi-period measures of risk account for the path that the value of an investment portfolio takes. In the context of probabilistic risk measures, the focus has traditionally been on the magnitude of investment loss, and not on the dimension associated with the passage of time. In this paper, the concept of a temporal path-dependent risk measure is mathematically formalized in order to capture the risk associated with the temporal dimension of a stochastic process, and its theoretical properties are analyzed. We then study the temporal dimension of investment drawdown (its duration), which measures the length of excursions below a running maximum. Its properties in the context of risk measures are analyzed both theoretically and empirically. In particular, we show that duration captures serial correlation in the returns of two major asset classes. We conclude by discussing the challenges of path-dependent temporal risk estimation in practice.

Keywords: temporal risk, path-dependent risk, drawdown duration, maximum drawdown, serial correlation

Suggested Citation

Mahmoud, Ola, The Temporal Dimension of Risk (December 12, 2016). Journal of Risk, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2884041

Ola Mahmoud (Contact Author)

University of St. Gallen ( email )

Institute of Economics
VarnbĂĽelstrasse 19
St Gallen, St. Gallen 9000
Switzerland

University of California at Berkeley ( email )

Consortium for Data Analytics in Risk
Evans Hall
Berkeley, CA 8032
United States

Swiss Finance Institute ( email )

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

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