Measures of financial risk

Novak, Serguei ORCID logoORCID: (2016) Measures of financial risk. In: Extreme Events in Finance: A Handbook of Extreme Value Theory and its Applications. Longin, François, ed. Wiley Handbooks in Financial Engineering and Econometrics . Wiley, pp. 215-237. ISBN 9781118650196. [Book Section] (doi:10.1002/9781118650318.ch10)

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The paper compares a number of available measures of financial risk and presents arguments in favor of a dynamic measure of risk. We argue that traditional measures are static, while the dynamic measure of risk lacks statistical scrutiny. The main obstacle to building a body of empirical evidence in support of the dynamic risk measure is computational difficulty of identifying local extrema as price charts appear objects of fractal geometry.
We overview approaches to financial risk measurement and formulate a number of open questions. The arguments are illustrated on examples of real data.

Item Type: Book Section
Additional Information: How to measure risk dynamically?
Traditional measures of risk are static: they barely change with the inflow of new information. The use of conditional measures involving recent prices only partially answers the question as the estimates of coefficients before the terms involving recent prices are typically small, making the corresponding conditional measures rather static.
This chapter presents a truly dynamic risk measure mTA .
We overview its properties and discuss pros and contras. We introduce also a new risk measure that combines a static and a dynamic ones, and discuss the advantages of using a combined measure.
The arguments are illustrated on real life examples involving data available on the eve of the “Black Monday” crash in 1987 and on the eve of the financial crisis in 2007-08. We find that dynamic measures signalled increased level of risk on the eve of the crises sending a clear warning signal to investors.
Online ISBN: 9781118650318
Research Areas: A. > School of Science and Technology > Design Engineering and Mathematics
Item ID: 20504
Notes on copyright: Copyright © 2017 by John Wiley & Son.
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Depositing User: Serguei Novak
Date Deposited: 12 Sep 2016 17:49
Last Modified: 16 Feb 2017 09:54

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