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Value at Risk as a Diagnostic Tool for Corporates: The Airline Industry

Author

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  • Winfried Hallerbach

    (Erasmus University Rotterdam)

  • Bert Menkveld

    (Erasmus University Rotterdam and KLM Schiphol)

Abstract

In recent years the Value at Risk (VaR) concept for measuringdownside risk has been widelystudied. VaR basically is a summary statistic that quantifies theexposure of an asset or portfolio tomarket risk, or the risk that a position declines in value withadverse market price changes. Threeparties have been particularly interested: financial institutions,regulators and corporates. In this paper, we focus on VaR use for corporates. This field isrelatively unexplored. We showhow VaR can be helpful to study market value risk -- proxied by shareprice risk. We develop amethodology to decompose the overall VaR into components that areattributable to underlyingexternal risk factors and a residual idiosyncratic component.Apart from developing theoretical results, we study the airlineindustry to show what practicalresults our 'Component VaR framework' can yield. Like anymultinational company, an airlinefaces significant exposures to external risk factors, e.g. commodityprices, interest rates andexchange rates. In our opinion, Component VaR analysis can enrichdiscussions in the company onfinancial risk management and shareholder value.

Suggested Citation

  • Winfried Hallerbach & Bert Menkveld, 1999. "Value at Risk as a Diagnostic Tool for Corporates: The Airline Industry," Tinbergen Institute Discussion Papers 99-023/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:19990023
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    References listed on IDEAS

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    3. Christopher L. Culp & Merton H. Miller & Andrea M. P. Neves, 1998. "Value At Risk: Uses And Abuses," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(4), pages 26-38, January.
    4. Sweeney, Richard J & Warga, Arthur D, 1986. "The Possibility of Estimating Risk Premia in Asset Pricing Models," The Financial Review, Eastern Finance Association, vol. 21(2), pages 299-308, May.
    5. Jorion, Philippe, 1995. "Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 50(2), pages 507-528, June.
    6. René M. Stulz, 1996. "Rethinking Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 8-25, September.
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    Cited by:

    1. Farkas, Walter & Fringuellotti, Fulvia & Tunaru, Radu, 2020. "A cost-benefit analysis of capital requirements adjusted for model risk," Journal of Corporate Finance, Elsevier, vol. 65(C).
    2. Swidan, Hassan & Merkert, Rico & Kwon, Oh Kang, 2019. "Designing optimal jet fuel hedging strategies for airlines – Why hedging will not always reduce risk exposure," Transportation Research Part A: Policy and Practice, Elsevier, vol. 130(C), pages 20-36.
    3. Jingguo Wang & Aby Chaudhury & H. Raghav Rao, 2008. "Research Note ---A Value-at-Risk Approach to Information Security Investment," Information Systems Research, INFORMS, vol. 19(1), pages 106-120, March.

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