Compatibility of market risk measures

Grzegorz Mentel, Jacek Brożyna
2015 Journal of International Studies  
An important element of everyday financial decisions is to assess the scale of the risk of investing in various financial products. Knowledge on the degree of risk of the activities undertaken in this field allows a certain predictability about the negative effects that may occur. This is of great importance in the context of aversion to risk, and thus a better allocation of resources. A multitude of market risk measures is substantial and in addition they provide information about the risk of
more » ... about the risk of investment considered in a different perspective and form. A very interesting issue is the scale compatibility of these measures. It is important whether such measures to the same extent define the scale of risk and whether any signals about the dangers overlap in time. The above considerations based on the value at risk and so-caled RiskGrade have become a contribution to the creation of this publication. Compatibility of market risk measures 53 The purpose of this publication is, therefore, an attempt to assess two interesting, yet different, approaches to the analysis of market risk of financial instruments. One of them is a well-known Value at Risk 1 , the second one rarely used RiskGrades ™ methodology. These two distinct concepts show the risk differently. The first of these clarifies the scale of losses we may incur based on specific confidence level, the second, in turn shows the amount of risk in relation to baseline. The fundamental question that the authors of this publication tried to answer is a matter of indications "compatibility" of these methodologically distinct concepts with regard to information about the scale of the threats that we receive in their case. This publication is, therefore a fragment of a series of articles devoted directly to VaR methodology and its determinants -an impact assessment at the significance level on the effectiveness of the VaR estimates (Mentel, 2011), comparison of parametric and nonparametric methods (Mentel, 2013) , discussion focuses on the significance of historical observations which affect current market situations, and consequently impact short term forecasts (Mentel & Brożyna, 2014) , analyzing the impact of the decay factor  for estimating VaR (Mentel & Brożyna, 2015a) , the characteristics of a computer program for the calculation Value at Risk (Mentel & Brożyna, 2015b) . Value at Risk is the maximum amount that can be lost through investment in a portfolio for a specified time horizon at a given confidence level.
doi:10.14254/2071-8330.2015/8-2/5 fatcat:idazgpozovbcbowbyokjtzsapi