This paper attempts to provide a decision-theoretic foundation for the measurement of economic tail risk, which is not only closely related to utility theory but also relevant to statistical model uncertainty. The main result is that the only risk measures that satisfy a set of economic axioms...

Internationally operating firrns naturally face the decision whether or not to hedge the currencyrisk implied by foreign investments. In a recent paper, Bos, Mahieu and van Dijk (2000) evaluatethe returns from optimal and alternative currency hedging strategies, for a series of 7 models,using...

While it is often argued that allocation decisions can be best expressed in terms of exposure to rewarded risk factors, as opposed to somewhat arbitrary asset class decompositions, the practical implications of this paradigm shift for the optimal design of the policy portfolio still remain...

Various concepts appeared in the existing literature to evaluate the risk exposure of a financial or insurance firm/subsidiary/line of business due to the occurrence of some extreme scenarios. Many of those concepts, such as Marginal Expected Shortfall or Tail Conditional Expectation, are simply...

We examine the problem of decision making using a probabilistic model when there is material uncertainty concerning the accuracy of the model coupled with limited information about it. Such conditions could hold, for example, for the user of a complex commercial model of natural catastrophe...

Risk parity is a portfolio construction technique that scales sections of a portfolio—e.g., stocks, bonds, currencies, commodities—so that forecasted contributions to net portfolio risk match the budget. Because risks are measured from a point-estimate of covariance, the method is subject to...

In this paper, we study the worst-case distortion risk measure when information about distortion functions is partially available. We obtain the explicit forms of the worst-case distortion functions from several different sets of plausible distortion functions. When there is no concavity...

We gauge the return-generating potential of four investment strategies: value weighted, 60/40 fixed mix, unlevered and levered risk parity. We have three main findings. First, even over periods lasting decades, the start and end dates of a backtest can have a material effect on results; second,...

This article presents various techniques for downside risk control of an emerging markets equity index or long only fund. We evaluate different risk adjusted strategies applied to dynamic asset allocation between an emerging markets equity index and cash and at a later stage between an emerging...

The Basel Committee on Banking Supervision recently proposed fundamental changes in the regulatory treatment of financial institutions' trading book positions. Among others, a replacement of Value-at-Risk (α=0.99) by Expected Shortfall (α=0.975) for the quantification of market risk is...