Beyond cash-additive risk measures: when changing the numéraire fails

DOI10.1007/S00780-013-0220-9MaRDI QIDQ471176zbMATH OpenOpenAlexFDO

Authors Walter Farkas, Pablo Koch-Medina, Cosimo Munari

Publication date 14 November 2014

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1206.0478, http://hdl.handle.net/20.500.11850/75102

zbMATH Keywords

risk measuresvalue-at-riskquasiconvexitycash subadditivityacceptance setsdefaultable bondsgeneral eligible assetsshortfall risktail value-at-risk

Mathematics Subject Classification ID

Ordered topological structures (06F30)

Abstract: We discuss risk measures representing the minimum amount of capital a financial institution needs to raise and invest in a pre-specified eligible asset to ensure it is adequately capitalized. Most of the literature has focused on cash-additive risk measures, for which the eligible asset is a risk-free bond, on the grounds that the general case can be reduced to the cash-additive case by a change of numeraire. However, discounting does not work in all financially relevant situations, typically when the eligible asset is a defaultable bond. In this paper we fill this gap allowing for general eligible assets. We provide a variety of finiteness and continuity results for the corresponding risk measures and apply them to risk measures based on Value-at-Risk and Tail Value-at-Risk on $L^p$ spaces, as well as to shortfall risk measures on Orlicz spaces. We pay special attention to the property of cash subadditivity, which has been recently proposed as an alternative to cash additivity to deal with defaultable bonds. For important examples, we provide characterizations of cash subadditivity and show that, when the eligible asset is a defaultable bond, cash subadditivity is the exception rather than the rule. Finally, we consider the situation where the eligible asset is not liquidly traded and the pricing rule is no longer linear. We establish when the resulting risk measures are quasiconvex and show that cash subadditivity is only compatible with continuous pricing rules.

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Cited in

(24)

• Measuring risk with multiple eligible assets
• Risk measures beyond frictionless markets
• A comparison of techniques for dynamic multivariate risk measures
• Fatou property, representations, and extensions of law-invariant risk measures on general Orlicz spaces
• Portfolio optimization with quasiconvex risk measures
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• Law-invariant functionals that collapse to the mean
• Cash subadditive risk measures and interest rate ambiguity
• Star-Shaped Risk Measures
• Automatic Fatou property of law-invariant risk measures
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• Capital allocation rules and acceptance sets
• A continuous selection for optimal portfolios under convex risk measures does not always exist
• Diversification, protection of liability holders and regulatory arbitrage
• Qualitative robustness of utility-based risk measures
• OPTIMAL NUMERAIRES FOR RISK MEASURES

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