Abstract
This paper proposes a risk measure for a portfolio of European-style derivative securities
over a fixed time horizon under the Black–Scholes economy. The proposed risk measure
is scenario-based along the same line as [3]. The risk measure is constructed by using
the risk-neutral probability (Q-measure), the physical probability (P-measure) and a
family of subjective probability measures. The subjective probabilities are introduced
by using Girsanov’s theorem. In this way, we provide risk managers or regulators with the
flexibility of adjusting the risk measure according to their risk preferences and subjective
beliefs. The advantages of the proposed measure are that it is easy to implement and that
it satisfies the four desirable properties introduced in [3], which make it a coherent risk
measure. Finally, we incorporate the presence of transaction costs into our framework.
over a fixed time horizon under the Black–Scholes economy. The proposed risk measure
is scenario-based along the same line as [3]. The risk measure is constructed by using
the risk-neutral probability (Q-measure), the physical probability (P-measure) and a
family of subjective probability measures. The subjective probabilities are introduced
by using Girsanov’s theorem. In this way, we provide risk managers or regulators with the
flexibility of adjusting the risk measure according to their risk preferences and subjective
beliefs. The advantages of the proposed measure are that it is easy to implement and that
it satisfies the four desirable properties introduced in [3], which make it a coherent risk
measure. Finally, we incorporate the presence of transaction costs into our framework.
| Original language | English |
|---|---|
| Pages (from-to) | 819-835 |
| Journal | International Journal of Theoretical and Applied Finance |
| Volume | 4 |
| Issue number | 5 |
| DOIs | |
| Publication status | Published - 2001 |
| Externally published | Yes |