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What is a Good Risk Measure: Bridging the Gaps Between Data, Coherent Risk Measures, and Insurance R
Year Of Publication: 2007
Month Of Publication: July
Pages: 48
Download Count: 322
View Count:
Comment Num: 0
Language: EN
Source: working paper
Who Can Read: Free
Date: 7-20-2007
Publisher: Administrator
Choosing a proper risk measure is of great regulatory importance and is relevant to the interfaces of operations and finance, as exemplified in Basel Accord which uses VaR (or quantiles) in combination with scenario analysis as a preferred risk measure for banking and operational risk. Two main families of axiomatically based risk measures are the coherent risk measures, which assume subadditivity for random variables, and the insurance risk measures, which assume additivity for comonotonic random variables.

We propose new, data-based, risk measures, called natural risk statistics, that are characterized by a new set of axioms. The new axioms only require subadditivity for comonotonic random variables, consistent with prospect theory. We point out while many risk measures may be suitable for internal risk management, robustness is an important consideration for external risk measures.
Heyde, C_hris C. Sign in to follow this author
Kou, Steven G. Sign in to follow this author
Peng, Xianhua Sign in to follow this author
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