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Combining risk measures to overcome their limitations - spectrum representation of the sub-additivity issue, distortion requirement and added-value of the Spatial VaR solution: An application to Regulatory Requirement for Financial Institutions

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Abstract

To measure the major risks experienced by financial institutions, for instance Market, Credit and Operational, regarding the risk measures, the distributions used to model them and the level of confidence, the regulation either offers a limited choice or demands the implementation of a particular approach. In this paper, we highlight and illustrate the paradoxes and issues observed when implementing an approach over another, the inconsistencies between the methodologies suggested and the problems related to their interpretation. Starting from the notion of coherence, we discuss their properties, we propose alternative solutions, new risk measures like spectrum and spatial approaches, and we provide practitioners and supervisor with some recommendations to assess, manage and control risks in a financial institution

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  • Dominique Guegan & Bertrand K. Hassani, 2016. "Combining risk measures to overcome their limitations - spectrum representation of the sub-additivity issue, distortion requirement and added-value of the Spatial VaR solution: An application to Regul," Documents de travail du Centre d'Economie de la Sorbonne 16066, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:16066
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    References listed on IDEAS

    as
    1. Dominique Guegan & Bertrand Hassani & Cédric Naud, 2011. "An efficient threshold choice for operational risk capital computation," Post-Print halshs-00790217, HAL.
    2. Dominique Guegan & Pierre-André Maugis, 2010. "An Econometric Study of Vine Copulas," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00492124, HAL.
    3. J. Dhaene & R. J. A. Laeven & S. Vanduffel & G. Darkiewicz & M. J. Goovaerts, 2008. "Can a Coherent Risk Measure Be Too Subadditive?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(2), pages 365-386, June.
    4. Dominique Guegan & Pierre-André Maugis, 2008. "New prospects on vines," Documents de travail du Centre d'Economie de la Sorbonne b08095, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne, revised Mar 2010.
    5. Dominique Guegan & Bertrand Hassani, 2013. "Multivariate VaRs for operational risk capital computation: a vine structure approach," Post-Print halshs-00645778, HAL.
    6. Dominique Guegan & Bertrand Hassani, 2013. "Multivariate VaRs for operational risk capital computation: a vine structure approach," PSE-Ecole d'économie de Paris (Postprint) halshs-00645778, HAL.
    7. Daníelsson, Jón & Jorgensen, Bjørn N. & Samorodnitsky, Gennady & Sarma, Mandira & de Vries, Casper G., 2013. "Fat tails, VaR and subadditivity," Journal of Econometrics, Elsevier, vol. 172(2), pages 283-291.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Risk measures; Sub-additivity; Level of confidence; Distributions; Financial regulation; Distortion; Spectral measure; Spectrum;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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