Measuring and Optimising Extreme Sectoral Risk in Australia
Faculty of Business and Law
School of Accounting, Finance and Economics / Finance, Economics, Markets and Accounting Research Centre
Relative industry sector risk is important to equities investors in determining portfolio mix, to banks in setting credit concentration policies, and to economic policy-makers in determining sectors vulnerable to downturn or corporate failures. This paper examines relative risk among Australian sectors prior to and during the Global Financial Crisis (GFC) using Value at Risk (VaR) and Conditional Value at Risk (CVaR, an extreme risk measure), and finds no sector risk correlation between these periods. Additionally, no correlation is found between VaR and CVaR outcomes, meaning VaR fails to identify accurately the riskiest industry sectors during times of extreme volatility.