Measuring the Risk of Large Losses

Journal of Investment Management (JOIM), Fourth Quarter 2008

19 Pages Posted: 1 Oct 2005 Last revised: 10 Jan 2012

See all articles by Kay Giesecke

Kay Giesecke

Stanford University - Management Science & Engineering

Thorsten Schmidt

University of Freiburg

Stefan Weber

ORIE, Cornell University

Date Written: 2008

Abstract

Risk management is an important component of the investment process. It requires quantitative measures of risk that provide a metric for the comparison of financial positions. In this expository note we give an overview of risk measures. In particular, we contrast different risk measures with respect to their sensitivity to potentially large losses due to market wide shocks. The industry standard value at risk exhibits many deficiencies. It does not account for the size of the losses and may penalize diversification. We compare value at risk to alternative risk measures including average value at risk and the less well know but superior utility-based shortfall risk.

Keywords: Distribution-invariant risk measures, utility-based shortfall risk, average value at risk, value at risk, event risk, extreme events

JEL Classification: C15, C60

Suggested Citation

Giesecke, Kay and Schmidt, Thorsten and Weber, Stefan, Measuring the Risk of Large Losses (2008). Journal of Investment Management (JOIM), Fourth Quarter 2008, Available at SSRN: https://ssrn.com/abstract=810886

Kay Giesecke (Contact Author)

Stanford University - Management Science & Engineering ( email )

475 Via Ortega
Stanford, CA 94305
United States
(650) 723 9265 (Phone)
(650) 723 1614 (Fax)

HOME PAGE: http://https://giesecke.people.stanford.edu

Thorsten Schmidt

University of Freiburg ( email )

Fahnenbergplatz
Freiburg, D-79085
Germany

Stefan Weber

ORIE, Cornell University ( email )

Ithaca, NY
United States

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