The Present and Future of Financial Risk Management

ISMA Centre Discussion Paper No. DP2003-12

25 Pages Posted: 26 Feb 2004

See all articles by Carol Alexander

Carol Alexander

University of Sussex Business School; Peking University HSBC Business School

Date Written: February 20, 2004

Abstract

Current research on financial risk management applications of econometrics centres on the accurate assessment of individual market and credit risks with relatively little theoretical or applied econometric research on other types of risk, aggregation risk, data incompleteness and optimal risk control. We argue that consideration of the model risk arising from crude aggregation rules and inadequate data could lead to a new class of reduced form Bayesian risk assessment models. Logically, these models should be set within a common factor framework that allows proper risk aggregation methods to be developed. We explain how such a framework could also provide the essential links between risk control, risk assessments and the optimal allocation of resources.

Keywords: Financial risk assessment, risk control, RAROC, economic capital, regulatory capital, optimal allocation of resources

JEL Classification: C11, C13, G20

Suggested Citation

Alexander, Carol, The Present and Future of Financial Risk Management (February 20, 2004). ISMA Centre Discussion Paper No. DP2003-12, Available at SSRN: https://ssrn.com/abstract=478802 or http://dx.doi.org/10.2139/ssrn.478802

Carol Alexander (Contact Author)

University of Sussex Business School ( email )

Falmer, Brighton BN1 9SL
United Kingdom

HOME PAGE: http://www.coalexander.com

Peking University HSBC Business School ( email )

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