Post by Sapphire Capital on Feb 19, 2009 20:07:40 GMT 4
Extreme Risk Management
Lisa R. Goldberg
MSCI Barra
Michael Y. Hayes
MSCI Barra
Jose Menchero
MSCI Barra
Indrajit Mitra
MSCI Barra
February 11, 2009
MSCI Barra Research Paper No. 2009-4
Abstract:
Quantitative risk management relies on a constellation of tools that are used to analyze portfolio risk. We develop the standard toolkit, which includes betas, risk budgets and correlations, in a general, coherent, mnemonic framework centered around marginal risk contributions. We apply these tools to generate side-by-side analyses of volatility and expected shortfall, which is a measure of average portfolio excess of value-at-risk. We focus on two examples whose importance is highlighted by the current economic crisis. By examining downside protection provided by an out-of-the-money put option we show that the diversification benefit of the option is greater for a risk measure that is more highly concentrated in the tail of the distribution. By comparing two-asset portfolios that are distinguished only by the likelihood of coincident extreme events, we show that expected shortfall measures market contagion in a way that volatility cannot.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1341363_code1141713.pdf?abstractid=1341363&mirid=1
Lisa R. Goldberg
MSCI Barra
Michael Y. Hayes
MSCI Barra
Jose Menchero
MSCI Barra
Indrajit Mitra
MSCI Barra
February 11, 2009
MSCI Barra Research Paper No. 2009-4
Abstract:
Quantitative risk management relies on a constellation of tools that are used to analyze portfolio risk. We develop the standard toolkit, which includes betas, risk budgets and correlations, in a general, coherent, mnemonic framework centered around marginal risk contributions. We apply these tools to generate side-by-side analyses of volatility and expected shortfall, which is a measure of average portfolio excess of value-at-risk. We focus on two examples whose importance is highlighted by the current economic crisis. By examining downside protection provided by an out-of-the-money put option we show that the diversification benefit of the option is greater for a risk measure that is more highly concentrated in the tail of the distribution. By comparing two-asset portfolios that are distinguished only by the likelihood of coincident extreme events, we show that expected shortfall measures market contagion in a way that volatility cannot.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1341363_code1141713.pdf?abstractid=1341363&mirid=1