Living on the edge: how risky is it to operate at the limit of the tolerated risk?

Living on the edge: how risky is it to operate at the limit of the tolerated risk?

0.00 Avg rating0 Votes
Article ID: iaor20104505
Volume: 177
Issue: 1
Start Page Number: 21
End Page Number: 45
Publication Date: Jun 2010
Journal: Annals of Operations Research
Authors:
Keywords: value at risk
Abstract:

This paper studies some of the implicit risks associated with strategies followed by a risk averse investor who maximizes the expected value of his final wealth, subject to a risk tolerance constraint characterized in terms of a convex risk measure such as Conditional Value-at-Risk. Embedded probability measures are uncovered using duality theory; these are used to assess the probability of surpassing a standard Value-at-Risk threshold. Using one of these embedded probabilities, a closed-form measure of the financial cost of hedging the loss exposure associated to the optimal strategies is derived and shown to be, under certain assumptions, a coherent measure of risk.

Reviews

Required fields are marked *. Your email address will not be published.