Value at Risk and Bank Capital Management

5.7 Measuring Business Risk in Practice: Defi ning a

Measure of Earnings at Risk

In general terms, earnings at risk (EaR) can be identifi ed with the losses generated by a

given business unit under the maximum adverse variation in its earnings within a given

time horizon and confi dence interval. For instance, for the asset management business,

one could try to build a distribution of the earnings produced by the fund management

company and identify EaR at a 99% confi dence level as the one one-hundreth quantile

of the earnings distribution. The fi rst thorough discussion of the EaR concept for business

risk is contained in Matten (2000). Matten iden ...