Preprint Article Version 1 This version is not peer-reviewed

Distinguishing Familiar Random Variables through the Use of Risk Measures

Version 1 : Received: 12 April 2019 / Approved: 16 April 2019 / Online: 16 April 2019 (10:48:48 CEST)

How to cite: Arendt, C.; Tarrant, W. Distinguishing Familiar Random Variables through the Use of Risk Measures. Preprints 2019, 2019040182 Arendt, C.; Tarrant, W. Distinguishing Familiar Random Variables through the Use of Risk Measures. Preprints 2019, 2019040182

Abstract

The use of risk measures such as the Value at Risk (VaR) or Tail Conditional Expectation (TCE) is required by the Basel Committee on Banking Supervision in determining a bank’s risk profile. However, both measures can be shown to have shortcomings in the information that they provide to regulators and investors. In this paper we present an introduction to risk measure calculations before demonstrating the weaknesses of these measures. Through the exploration of specific cases we show how familiar yet differing risk profiles have identical values for combinations of these measures. From this evidence we recommend that a sequence of several risk measures should be used to give a more accurate representation of the risk contained on banking balance sheet.

Subject Areas

risk measure; value at risk; tail conditional expectation; expected shortfall; bank capital; Basel accords

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