#jsDisabledContent { display:none; } My Account |  Register |  Help
 Flag as Inappropriate This article will be permanently flagged as inappropriate and made unaccessible to everyone. Are you certain this article is inappropriate?          Excessive Violence          Sexual Content          Political / Social Email this Article Email Address:

# Risk measure

Article Id: WHEBN0012498127
Reproduction Date:

 Title: Risk measure Author: World Heritage Encyclopedia Language: English Subject: Collection: Publisher: World Heritage Encyclopedia Publication Date:

### Risk measure

In financial mathematics, a risk measure is used to determine the amount of an asset or set of assets (traditionally currency) to be kept in reserve. The purpose of this reserve is to make the risks taken by financial institutions, such as banks and insurance companies, acceptable to the regulator. In recent years attention has turned towards convex and coherent risk measurement.

## Contents

• Mathematically 1
• Set-valued 2
• Mathematically 2.1
• Examples 3
• Well known risk measures 3.1
• Variance 3.2
• Relation to acceptance set 4
• Risk measure to acceptance set 4.1
• Acceptance set to risk measure 4.2
• Relation with deviation risk measure 5
• See also 6
• References 7
• Further reading 8

## Mathematically

A risk measure is defined as a mapping from a set of random variables to the real numbers. This set of random variables represents portfolio returns. The common notation for a risk measure associated with a random variable X is \rho(X). A risk measure \rho: \mathcal{L} \to \mathbb{R} \cup \{+\infty\} should have certain properties:[1]

Normalized
\rho(0) = 0
Translative
\mathrm{If}\; a \in \mathbb{R} \; \mathrm{and} \; Z \in \mathcal{L} ,\;\mathrm{then}\; \rho(Z + a) = \rho(Z) - a
Monotone
\mathrm{If}\; Z_1,Z_2 \in \mathcal{L} \;\mathrm{and}\; Z_1 \leq Z_2 ,\; \mathrm{then} \; \rho(Z_2) \leq \rho(Z_1)

## Set-valued

In a situation with \mathbb{R}^d-valued portfolios such that risk can be measured in m \leq d of the assets, then a set of portfolios is the proper way to depict risk. Set-valued risk measures are useful for markets with transaction costs.[2]

### Mathematically

A set-valued risk measure is a function R: L_d^p \rightarrow \mathbb{F}_M, where L_d^p is a d-dimensional Lp space, \mathbb{F}_M = \{D \subseteq M: D = cl (D + K_M)\}, and K_M = K \cap M where K is a constant solvency cone and M is the set of portfolios of the m reference assets. R must have the following properties:[3]

Normalized
K_M \subseteq R(0) \; \mathrm{and} \; R(0) \cap -\mathrm{int}K_M = \emptyset
Translative in M
\forall X \in L_d^p, \forall u \in M: R(X + u1) = R(X) - u
Monotone
\forall X_2 - X_1 \in L_d^p(K) \Rightarrow R(X_2) \supseteq R(X_1)

## Examples

### Variance

Variance (or standard deviation) is not a risk measure. This can be seen since it has neither the translation property nor monotonicity. That is, Var(X + a) = Var(X) \neq Var(X) - a for all a \in \mathbb{R}, and a simple counterexample for monotonicity can be found. The standard deviation is a deviation risk measure.

## Relation to acceptance set

There is a one-to-one correspondence between an acceptance set and a corresponding risk measure. As defined below it can be shown that R_{A_R}(X) = R(X) and A_{R_A} = A.[4]

### Risk measure to acceptance set

• If \rho is a (scalar) risk measure then A_{\rho} = \{X \in L^p: \rho(X) \leq 0\} is an acceptance set.
• If R is a set-valued risk measure then A_R = \{X \in L^p_d: 0 \in R(X)\} is an acceptance set.

### Acceptance set to risk measure

• If A is an acceptance set (in 1-d) then \rho_A(X) = \inf\{u \in \mathbb{R}: X + u1 \in A\} defines a (scalar) risk measure.
• If A is an acceptance set then R_A(X) = \{u \in M: X + u1 \in A\} is a set-valued risk measure.

## Relation with deviation risk measure

There is a one-to-one relationship between a deviation risk measure D and an expectation-bounded risk measure \rho where for any X \in \mathcal{L}^2

• D(X) = \rho(X - \mathbb{E}[X])
• \rho(X) = D(X) - \mathbb{E}[X].

\rho is called expectation bounded if it satisfies \rho(X) > \mathbb{E}[-X] for any nonconstant X and \rho(X) = \mathbb{E}[-X] for any constant X.[5]

## References

1. ^ Artzner, Philippe; Delbaen, Freddy; Eber, Jean-Marc; Heath, David (1999). "Coherent Measures of Risk" (pdf). Mathematical Finance 9 (3): 203–228.
2. ^ Jouini, Elyes; Meddeb, Moncef; Touzi, Nizar (2004). "Vector–valued coherent risk measures". Finance and Stochastics 8 (4): 531–552.
3. ^ Hamel, A. H.; Heyde, F. (2010). "Duality for Set-Valued Measures of Risk" (pdf). SIAM Journal on Financial Mathematics 1 (1): 66–95.
4. ^ Andreas H. Hamel; Frank Heyde; Birgit Rudloff (2011). "Set-valued risk measures for conical market models" (pdf). Mathematics and Financial Economics 5 (1): 1–28.
5. ^ Rockafellar, Tyrrell; Uryasev, Stanislav; Zabarankin, Michael (2002). "Deviation Measures in Risk Analysis and Optimization" (pdf). Retrieved October 13, 2011.

## Further reading

• Crouhy, Michel; D. Galai; R. Mark (2001). Risk Management.
• Kevin, Dowd (2005). Measuring Market Risk (2nd ed.).
• Foellmer, Hans; Schied, Alexander (2004). Stochastic Finance. de Gruyter Series in Mathematics 27. Berlin:
• Shapiro, Alexander; Dentcheva, Darinka;
This article was sourced from Creative Commons Attribution-ShareAlike License; additional terms may apply. World Heritage Encyclopedia content is assembled from numerous content providers, Open Access Publishing, and in compliance with The Fair Access to Science and Technology Research Act (FASTR), Wikimedia Foundation, Inc., Public Library of Science, The Encyclopedia of Life, Open Book Publishers (OBP), PubMed, U.S. National Library of Medicine, National Center for Biotechnology Information, U.S. National Library of Medicine, National Institutes of Health (NIH), U.S. Department of Health & Human Services, and USA.gov, which sources content from all federal, state, local, tribal, and territorial government publication portals (.gov, .mil, .edu). Funding for USA.gov and content contributors is made possible from the U.S. Congress, E-Government Act of 2002.

Crowd sourced content that is contributed to World Heritage Encyclopedia is peer reviewed and edited by our editorial staff to ensure quality scholarly research articles.

By using this site, you agree to the Terms of Use and Privacy Policy. World Heritage Encyclopedia™ is a registered trademark of the World Public Library Association, a non-profit organization.

Copyright © World Library Foundation. All rights reserved. eBooks from World Library are sponsored by the World Library Foundation,
a 501c(4) Member's Support Non-Profit Organization, and is NOT affiliated with any governmental agency or department.