Title

Measuring and Modelling Risk

Document Type

Journal Article

Publisher

Inderscience Enterprises

Faculty

Business and Law

School

Accounting, Finance and Economics

RAS ID

9142

Comments

This article was originally published as: Allen, D. E. (2009). Measuring and Modelling Risk. Global Business and Economics Review, 11 (3/4), 199-224.

Abstract

This paper will examine some commonly adopted approaches to the measurement of risk in finance and the various shortcomings implicit in the underpinnings of these approaches: early views on the nature of risk and uncertainty (Hume, Bernoulli, Knight, Keynes and Ramsey); the adoption of a mean variance decision choice criteria as a central foundation in financial economics and its accompanying limitations; the various approaches in financial econometrics to modelling volatility (ARCH, GARCH, stochastic volatility, realised volatility and attempts to capture ‘tail risk’); the measurement of risk implicit in applications of option pricing models and implied volatility (in particular the VIX index); the Basel Agreements and convention of modelling risk in a value at risk (VaR) framework; and the attractions of conditional value at risk (CVaR) as an alternative metric. I shall conclude with a consideration of the shortcomings of these various approaches when faced with a system wide shock as recently experienced in the global financial crisis.

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