Abstract: Abstract Choosing a proper external risk measure is of great regulatory importance, as exemplified in the Basel II Accord and its recent revision, which use Value‐at‐Risk (VaR) with scenario analysis as the external risk measure for setting capital requirement. The main motivation of this article is to investigate how to choose a good external risk measure. While many risk measures may be suitable for internal risk management, we argue that risk measures used for external regulation should have robustness with respect to model misspecification (e.g., by incorporating scenario analysis) and small changes in the data (e.g., by using robust statistics). We propose new data‐based risk measures called natural risk statistics that are characterized by a new set of axioms based on comonotonicity from decision theory. Natural risk statistics include VaR with scenario analysis, in particular Basel II risk measures, as special cases; therefore, we provide a theoretical framework to understand and extend the Basel II accord, if needed.
Publication Year: 2011
Publication Date: 2011-01-01
Language: en
Type: other
Indexed In: ['crossref']
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Cited By Count: 4
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