Alternative measures to value at risk

Abstract

Purpose – The purpose of this article is to introduce a new method of estimating risk as an alternative to value at risk (VaR), drawing on the risk assessment literature in environmental science. Design/methodology/approach – A commonly used and accepted measure of market risk is VaR, defined as the difference between initial portfolio value and a probabilistic lower bound B on the portfolio value at time T. To take account of situations where the portfolio value may fall below B prior to time T, an an alternative to VaR is proposed based on first passage time distributions. Findings – It is argued that the resulting expected minimum portfolio value over the time frame T provides a clear alt..