Pospisil, Libor and Vecer, Jan and Xu, Mingxin (2007): Tradable measure of risk.

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Abstract
The main idea of this paper is to introduce Tradeable Measures of Risk as an objective and model independent way of measuring risk. The present methods of risk measurement, such as the standard ValueatRisk supported by BASEL II, are based on subjective assumptions of future returns. Therefore two different models applied to the same portfolio can lead to different values of a risk measure. In order to achieve an objective measurement of risk, we introduce a concept of {\em Realized Risk} which we define as a directly observable function of realized returns. Predictive assessment of the future risk is given by {\em Tradeable Measure of Risk}  the price of a financial contract which pays its holder the Realized Risk for a certain period. Our definition of the Realized Risk payoff involves a Weighted Average of Ordered Returns, with the following special cases: the worst return, the empirical ValueatRisk, and the empirical mean shortfall. When Tradeable Measures of Risk of this type are priced and quoted by the market (even of an experimental type), one does not need a model to calculate values of a risk measure since it will be observed directly from the market. We use an option pricing approach to obtain dynamic pricing formulas for these contracts, where we make an assumption about the distribution of the returns. We also discuss the connection between Tradeable Measures of Risk and the axiomatic definition of Coherent Measures of Risk.
Item Type:  MPRA Paper 

Original Title:  Tradable measure of risk 
Language:  English 
Keywords:  dynamic risk measure; conditional valueatrisk; shortfall 
Subjects:  G  Financial Economics > G1  General Financial Markets > G13  Contingent Pricing ; Futures Pricing G  Financial Economics > G2  Financial Institutions and Services > G28  Government Policy and Regulation 
Item ID:  5059 
Depositing User:  Mingxin Xu 
Date Deposited:  28 Sep 2007 
Last Modified:  26 Sep 2019 16:26 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/5059 