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Conditional Value-at-Risk: Theory and Applications

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  • Jakob Kisiala

Abstract

This thesis presents the Conditional Value-at-Risk concept and combines an analysis that covers its application as a risk measure and as a vector norm. For both areas of application the theory is revised in detail and examples are given to show how to apply the concept in practice. In the first part, CVaR as a risk measure is introduced and the analysis covers the mathematical definition of CVaR and different methods to calculate it. Then, CVaR optimization is analysed in the context of portfolio selection and how to apply CVaR optimization for hedging a portfolio consisting of options. The original contributions in this part are an alternative proof of Acerbi's Integral Formula in the continuous case and an explicit programme formulation for portfolio hedging. The second part first analyses the Scaled and Non-Scaled CVaR norm as new family of norms in $\mathbb{R}^n$ and compares this new norm family to the more widely known $L_p$ norms. Then, model (or signal) recovery problems are discussed and it is described how appropriate norms can be used to recover a signal with less observations than the dimension of the signal. The last chapter of this dissertation then shows how the Non-Scaled CVaR norm can be used in this model recovery context. The original contributions in this part are an alternative proof of the equivalence of two different characterizations of the Scaled CVaR norm, a new proposition that the Scaled CVaR norm is piecewise convex, and the entire \autoref{chapter:Recovery_using_CVaR}. Since the CVaR norm is a rather novel concept, its applications in a model recovery context have not been researched yet. Therefore, the final chapter of this thesis might lay the basis for further research in this area.

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  • Jakob Kisiala, 2015. "Conditional Value-at-Risk: Theory and Applications," Papers 1511.00140, arXiv.org.
  • Handle: RePEc:arx:papers:1511.00140
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    References listed on IDEAS

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    1. Acerbi, Carlo & Tasche, Dirk, 2002. "On the coherence of expected shortfall," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1487-1503, July.
    2. Rupak Chatterjee, 2014. "Practical Methods of Financial Engineering and Risk Management," Springer Books, Springer, number 978-1-4302-6134-6, February.
    3. A. Ben-Tal & A. Nemirovski, 1998. "Robust Convex Optimization," Mathematics of Operations Research, INFORMS, vol. 23(4), pages 769-805, November.
    4. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
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    Cited by:

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