Following the final revision of Basel II, Value-at-Risk (VaR) is becoming one of the most used risk measures for managing market and operational risks. Nevertheless, in recent years, some undesirable drawbacks in its use have been pointed out by academics. One of them is the so-called ‘lacking in sub-additivity’, which turns out to be not only an annoying technicality, but also the ‘real culprit’ of VaR misleading guide in capital allocation strategy. A number of numerical examples prove the fallacy of some common conjectures. Eventually, a risk measure, which is a revised version of the Expected Shortfall (ES), is suggested as a sound alternative.

Value-at-Risk: is lacking in sub-additivity just an annoying technicality?

TIBILETTI, Luisa
2008-01-01

Abstract

Following the final revision of Basel II, Value-at-Risk (VaR) is becoming one of the most used risk measures for managing market and operational risks. Nevertheless, in recent years, some undesirable drawbacks in its use have been pointed out by academics. One of them is the so-called ‘lacking in sub-additivity’, which turns out to be not only an annoying technicality, but also the ‘real culprit’ of VaR misleading guide in capital allocation strategy. A number of numerical examples prove the fallacy of some common conjectures. Eventually, a risk measure, which is a revised version of the Expected Shortfall (ES), is suggested as a sound alternative.
2008
9
44
51
http://www.inderscience.com/browse/index.php?journalCODE=ijram
Value-at-Risk (VaR); risk diversification; risk measure sub-additivity
L. Tibiletti
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2318/45466
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