Beyond Coherence and Extreme Losses : Root Lower Partial Moment as a Risk Measure

Expected Shortfall (ES) as a risk measure has several shortcomings. It does not in general reward diversification; it considers only extreme losses; and it assumes risk neutrality. We propose an alternative risk measure, the n-th order Root Lower Partial Moment (rLPM), that overcomes these and other shortcomings. An options strategy illustrates the advantages of rLPM over ES in preventing perverse risk taking. Our results suggest that bank regulators should take into consideration more than extreme losses in the setting of minimum regulatory capital