Beyond Coherence and Extreme Losses: Root Lower Partial Moment as a Risk Measure

34 Pages Posted: 26 Oct 2004

See all articles by António M.R.G. Barbosa

António M.R.G. Barbosa

ISCTE-IUL - Instituto Universitário de Lisboa

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Date Written: August 2004

Abstract

Expected Shortfall (ES) as a risk measure has several shortcomings. It does not in general reward diversification; it considers only extreme losses; and it assumes risk neutrality. We propose an alternative risk measure, the n-th order Root Lower Partial Moment (rLPM), that overcomes these and other shortcomings. An options strategy illustrates the advantages of rLPM over ES in preventing perverse risk taking. Our results suggest that bank regulators should take into consideration more than extreme losses in the setting of minimum regulatory capital.

Keywords: Risk management, lower partial moment, expected shortfall, coherent risk measures

JEL Classification: G11, G20, G28

Suggested Citation

Barbosa, António M.R.G. and Ferreira, Miguel Almeida, Beyond Coherence and Extreme Losses: Root Lower Partial Moment as a Risk Measure (August 2004). Available at SSRN: https://ssrn.com/abstract=609221 or http://dx.doi.org/10.2139/ssrn.609221

António M.R.G. Barbosa

ISCTE-IUL - Instituto Universitário de Lisboa ( email )

Av. das Forcas Armadas
Lisbon, 1649-026
Portugal
+351 21 790 39 16 (Phone)

Miguel Almeida Ferreira (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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