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MEASURING MARKET RISK: VALUE-AT-RISK, EXPECTED SHORTFALL, AND SIMILAR METRICS
The measurement of market risk has evolved from simple naïve indicators, such as the face value or “notional” amount of an individual security, through more complex measures of price sensitivities, such as the basis point value or duration approach of a bond (Chapter 6) and various specific measures of risk for derivatives (“the Greeks”), to relatively sophisticated risk measures such as the latest value-at-risk (VaR) methodology for whole portfolios of securities and new risk metrics such as stress-VaR, expected shortfall, and scenario analysis.
In this chapter we’ll chart this evolutionary trajectory and spend some time examining the principles that lie behind VaR ...
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