Measuring Market Risk: Approaches and Inherent
Assumptions

Abstract

While few debate the need to measure market risk, less agreement exists as to the best way to accomplish this task. Measuring and understanding market risk is a challenging and multifaceted problem. Constantly changing and evolving financial markets preclude simple closed-form solutions. To make matters worse, the size of portfolios is increasing; they can contain millions of different securities. To model asset values, complexities must be simplified, with numerous assumptions profoundly influencing results. Understanding the assumptions allows for the effective use of these models, especially for risk measurement. We propose a classification system of market risk models that is based on analysis of key assumptions used.

TOPICS: Risk management, quantitative methods