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The temporal dimension of risk


Mahmoud, Ola (2017). The temporal dimension of risk. Journal of Risk, 19(3):57-83.

Abstract

Multi-period measures of risk account for the path that the value of an investment portfolio takes. In the context of probabilistic risk measures, the focus has traditionally been on the magnitude of investment loss, and not on the dimension associated with the passage of time. In this paper, the concept of a temporal path-dependent risk measure is mathematically formalized in order to capture the risk associated with the temporal dimension of a stochastic process, and its theoretical properties are analyzed. We then study the temporal dimension of investment drawdown (its duration), which measures the length of excursions below a running maximum. Its properties in the context of risk measures are analyzed both theoretically and empirically. In particular, we show that duration captures serial correlation in the returns of two major asset classes. We conclude by discussing the challenges of path-dependent temporal risk estimation in practice.

Abstract

Multi-period measures of risk account for the path that the value of an investment portfolio takes. In the context of probabilistic risk measures, the focus has traditionally been on the magnitude of investment loss, and not on the dimension associated with the passage of time. In this paper, the concept of a temporal path-dependent risk measure is mathematically formalized in order to capture the risk associated with the temporal dimension of a stochastic process, and its theoretical properties are analyzed. We then study the temporal dimension of investment drawdown (its duration), which measures the length of excursions below a running maximum. Its properties in the context of risk measures are analyzed both theoretically and empirically. In particular, we show that duration captures serial correlation in the returns of two major asset classes. We conclude by discussing the challenges of path-dependent temporal risk estimation in practice.

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3 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Finance
Social Sciences & Humanities > Strategy and Management
Language:English
Date:2017
Deposited On:14 Feb 2019 13:48
Last Modified:28 Jul 2020 14:06
Publisher:Infopro
ISSN:1465-1211
OA Status:Closed
Publisher DOI:https://doi.org/10.21314/JOR.2016.353
Other Identification Number:merlin-id:17371

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