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Risk-Adjusted Measures of Value Creation in Financial Institutions (Milne A., Onorato M.)

Risk-taking and Risk Management Stability&Soundness

Abstract Measuring value creation by comparing the RAROC of an exposure (the return on risk capital) with a single institution-wide hurdle rate is inconsistent with the standard theory of financial valuation. We use asset pricing theory to determine the appropriate hurdle rate for such a RAROC performance measure. We find that this hurdle rate varies with the skewness of asset returns. Thus the RAROC hurdle rate should differ substantially between equity which has a right skew and debt which has a pronounced left skew and also between different qualities of debt exposure. We discuss implications for financial institution risk management and supervision.
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Libref/ Milne A., Onorato M. (2009) “Risk-Adjusted Measures of Value Creation in Financial Institutions”, Bank of Finland Research Discussion Paper №25/2009, pp. 1-40
© Программирование — Александр Красильников, 2008
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