Filter by Categories
Accounting
Banking

Risk Management




Modified Conditional Value at Risk


A method of calculating conditional value at risk (conditional VaR , CVaR) that modifies or expands it (the conditional VaR) to correct for skewness and flat tails in a portfolio’s returns. In other words, modified conditional VaR adjusts the normal measure of value at risk to account for non-normally distributed returns of specific asset classes (e.g., private equity, hedge funds or technology stocks, emerging market stocks, etc.)

In so doing, it takes the higher moments of the return distribution into account by extending the percentile of the standard normal distribution (using Cornish-Fisher extension). A portfolio can be optimized by minimizing the modified conditional value-at-risk at a given confidence level. Contrary to the normal value at risk, for a financial asset has negative skewness and/ or a positive excess kurtosis, the modified CVaR will be larger. Furthermore, the risk measured only using volatility will be lower than the risk measured using skewness, volatility and kurtosis.

For example, in view of the overall risk-averse against extreme negative returns, optimizing a portfolio using a modified VaR at 99% confidence level will result in the lowest probability of loss exceeding the modified CVaR at that confidence level.

This measure of risk is known for short as mCVaR (MCVaR).



ABC
Risk management is a collection of tools, techniques and regimes that are used by businesses to deal with uncertainty. This involves planning and ...
Watch on Youtube
Remember to read our privacy policy before submission of your comments or any suggestions. Please keep comments relevant, respectful, and as much concise as possible. By commenting you are required to follow our community guidelines.

Comments


    Leave Your Comment

    Your email address will not be published.*