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: | Rodrguez-Mancilla Jos R |
Keywords: | value at risk |
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.