Cours Econometrie Finance R1 Part 1

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trie de la finance (2008/2009)

Arthur CHARPENTIER - e
Econom
etrie de la finance
Partie 1
Mesurer les risques
Arthur Charpentier
http ://perso.univ-rennes1.fr/arthur.charpentier/
Master 1, Universite Rennes 1
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Premier fil rouge du cours : la VaR
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Second fil rouge du cours : RiskMetrics
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Second fil rouge du cours : RiskMetrics
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Plan du cours
Introduction generale
Mesurer les risques, une introduction au Risk Manageemnt
Mesurer les risques ?
Value-at-Risk
Contexte et cadre regelementaire, B
ale II
Un (tout petit) peu deconomie de lincertain
Mod
eliser des rendements boursiers
Que cherche-t-on à modeliser ?
Processus ARCH et GARCH
Processus à volatilite stochastique
Du rendement dun titre au rendement dun portefeuille
Retour `
a la VaR : les probl`
emes destimation
Estimation de la Value-at-Risk, un mot de theorie des extremes
Estimation de la Value-at-Risk pour des processus GARCH
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La gestion des risques

` la fin des annees 90, les reglementations prudentielles convergent vers
A
ladoption de la VaR comme mesure de risque de reference.
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History of risk measures

The evolution of (analytical) Risk Management Tools (from Jorion (2007))
1938 bond duration
1952 Markowitz mean-variance framework
1963 Sharpes single beta model
1973 Black & Scholes option pricing formula
1983 RAROC, Risk Adjusted Return
1992 Stress testing
1993 Value-at-Risk (VaR)
1994 RiskMetrics
1997 CreditMetrics
1998 integration of credit and market risk
1999 coherent risk measures
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Market risks
Classical models for stock prices,
dynamic models (Bachelier (1900), Black & Scholes (1973)), Brownian
geometric
dSt = St dt +
V S dW ,
| {zt }t
| {z }
drift random part
where (Wt )t0 is a standard brownian motion,
more advanced dynamic models (Heston (1993)) have stochastic volatility
dS = S dt + V dW S
t
t
t
t
dVt = ( Vt )dt + Vt dW V ,
t
where (WtS )t0 and (WtV )t0 are two standard brownian motions (possibly
correlated).
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150
100
50
50
100
150
200
Stock price over 1 year, large volatility
200
Stock price over 1 year, large volatility
0.0
0.2
0.4
0.6
Time
0.8
1.0
0.0
0.2
0.4
0.6
0.8
1.0
Time
Fig. 1 Random generation of a stock price, dSt = St dt + St dWt .
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How to quantify market risks : volatility

All the information about uncertainty is summarized by the volatiliy - or
variance - parameter.
Note that this is one of the reason for the use of the Gaussian distribution, i.e.
X N (, 2 ) having density

2 !
1
1 x
f (x) = exp
2
2
Then = E(X) and 2 = V ar(X).
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Market risks
%."
%.0
#."
#.0
!#.0
!0."
0.0
0."
&sp/)ance
#.0
0.5
!#.0
!0.5
0.0
&sp/)ance
#.5
%.0
%.5
the capital asset pricing model (Markowitz (1970) or the Sharpe index are
based on the mean-variance framework,
#0
&ca)t!type
#5
"
#0
#"
&ca)t!t+pe
Fig. 2 Capital asset pricing model, the mean-variance framework.

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A (very) short word on diversification

Naturally, in higher dimension (when dealing with multiple stocks), Gaussian
vectors are considered

X1
1
12
1,2 1 2 1,d 1 d

2,d 2 d
22
X2
2 2,1 2 1

X=
..
..
..
.. N .. ,
.
.
.
.
.

Xd
d,1 d 1
d,2 d 2
d2
All the information about marginal risks is in the variances (i2 ) while all the
information on the dependence is in the correlation coefficients (i,j ).
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On the Gaussian distribution

The Gaussian distribution is very important for many reasons,
it is a stable distribution, i.e. it appears as a limiting distribution in the central
limit theorem : for i.i.d. Xi s with finite variance,
X E(X) L
n
N (0, 1).
VX
it is an elliptic distribution, i.e. X = + AX 0 where A0 A = , and where
X 0 has a spheric distribution, i.e. f (x0 ) is a function of x00 x0 (spherical level
curves),
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2
1
0
1
2
3
Level curves of a elliptical distribution
Level curves of a spherical distribution
Fig. 3 The Gaussian distribution.

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On the Gaussian distribution

As a consequence, if X N (, ), and if

11
X1
1
,
X=
N
21
X2
2
12
22
Xi N (i , i ), for all i = 1, , d,
0 X = 1 X1 + + d Xd N (0 , 0 ),
1
X 1 |X 2 = x2 N (1 + 12 1
2,2 (x2 2 ), 1,1 12 2,2 21 )
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Level curves of a elliptical distribution

3
Density of the Gaussian distribution
0.20
0.15
0.10
0.05
0
0.00
3
2
1
0
3
2
1
3
2
3
Fig. 4 The Gaussian distribution.

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Value-at-Risk
The expression is quite recent and its origin is uncertain : in the 80s, some
papers introduced dollars-at-risk, capital-at-risk, income-at-risk, earning-at-risk
and finally value-at-risk
Denomination has been stabilized after the publication of RiskMetrics Technical
Document in 1994, by JPMorgan. Note that the work accomplished by JPMorgan
was more a pulic relation campaign than an advanced technical study : VaR is
more a practice than a theory.
VaR summarizes the worst loss ever on a target horizon that will not be exceeded
with a given level of confidence, i.e. formaly it is a quantile of the projected
distibution of gains and losses over the target horizon
Till Guldimann (1992) created the term value-at-risk while head of global
research at JP Morgan in the late 80s. It appeared in the G30 report (group of
thirty) in July 1993.
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The Basel II accord (2004)

June 2004, the Basel Committee finalized the Basel Accords, based on three
pillars
minimum regulatory requierements, i.e. some risk-based capital requirements :
set capital charges against credit risk (internal rating based), market risk
(internal model approach) and operational risk. the goal is to keep constant
the level of capital in the global banking syste : 8% of risk weighted assets,
supervisorv review, i.e. expanded role for bank regulartors, to ensure that
banks operate above the minimum regulatory capital ratios, that banks have
appropriate processes for assessing their risks, and appropriate corrective
actions
market discipline, i.e. set of disclosure recommendations, encouraging to
publish informations about exposures, risk profiles, capital cushion...
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The Basel II accord (2004)

From the first pillar, there should be a credit risk charge (CRC), a market risk
charge (MRC) and an operationnal risk charge (ORC), and the banks total
capital must exceed the total-risk charge (TRC)
Capital > TRC = CRC + MRC + ORC.
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Why using VaR as a risk measure ?

Markowitz (1952) claimed that standard deviation should be an intuitive and
appropriate risk measure (leading to the mean-variance trade-off).
The same year, Roy (1952) claimed that the optimal bundle of assets
(investment) for investors who employ the safety first principle is the portfolio
that minimizes the probability of disaster.
Roy A. D. (1952), Safety first and the holding of assets, Econometrica, 20,
431-449.
Markowitz H. M. (1952), Portfolio selection, Journal of Finance, 7, 77-91.
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Edgeworth, et lhypoth`
ese normale
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Edgeworth, et lhypoth`
ese normale
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Lhypoth`
ese normale, d
epass
ee ?
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Markowitz et lapproche moyenne-variance
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Markowitz et lapproche moyenne-variance
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Roy et la notion de safety first
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Roy et la notion de safety first
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Introduction the risk measures, and risk perception

S. Clam [...] once said : I define a coward as someone who will not bet when
you offer him two-to-one odds and let him choose his side .
With the centuries old St. Petersburg paradox in my mind, I pedantically
corrected him : You mean will not make a sufficiently small bet (so that the
change in the marginal utility of money will not contaminate his choice)..
Recalling this conversation, a few years ago I offered some lunch colleagues to
bet each $200 to $100 that the side of a coin they specified would not appear at
the first tom. One distinguished scholar - who lays no claim to advanced
mathematical skills - gave the following answer :
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Introduction the risk measures, and risk perception

I wont bet because I would fell the $100 loss more than the $200 gain. But
Ill take you on if you promise to let me make 100 such bets .
What was behind this interesting answer ? He, and many others, have given
something liko tho following explanation. One toss is not enough to make it
reasonably sure that the law of averages will turn out in my favor. But in a
hundred tosses of a coin, the law of large numbers will make a dam good bet. I
am, so to speak, virtually sure to come out ahead in such a sequence, and that is
why I accept the sequence while rejecting the single toss. .
One can check that P(gain > 0) = P(at least 34 odds) 99.91%.
However, with one toss, the maximal loss is $100 but it becomes $10,000 with
100 tosses.
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Notations
Let X be a real valued random variable, interpreted as a (net) loss.
Definition 1. A risk measure is a function R : X R, interpreted as the capital
necessary.
Example 2. R(X) = sup{X(), }, R(X) = sup{EQ (X), Q Q} where Q
1
is a set of probabilities (called scenarios), R(X) = FX
() where (0, 1) ...etc.
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Risk measures and price of a risk

Pascal, Fermat, Condorcet, Huygens, dAlembert in the XVIIIth century
proposed to evaluate the produit scalaire des probabilites et des gains,
< p, x >=
n
X
pi xi = EP (X),
i=1
based on the règle des parties.

For Quetelet, the expected value was, in the context of insurance, the price that
guarantees a financial equilibrium.
From this idea, we consider in insurance the pure premium as EP (X). As in
Cournot (1843), lesperance mathematique est donc le juste prix des chances
(or the fair price mentioned in Feller (1953)).
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What is probability P ?
my dwelling is insured for $ 250,000. My additional premium for earthquake
insurance is $ 768 (per year). My earthquake deductible is $ 43,750... The more I
look to this, the more it seems that my chances of having a covered loss are about
zero. Im paying $ 768 for this ? (Business Insurance, 2001).
Estimated annualized proability in Seatle 1/250 = 0.4%,
Actuarial probability 768/(250, 000 43, 750) 0.37%
The probability for an actuary is 0.37% (closed to the actual estimated
probability), but it is much smaller for anyone else.
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Saint P
etersbourgs paradox
Problem proposed by Bernoulli (1713),
Une pièce de monnaie est lancee jusqu`
a ce que pile apparaisse. Le joueur A
reoit alors de la banque B la somme de 2n francs, ou n est le nombre total de
lancers. Quelle mise doit disposer A avant le premier jet pour que la partie soit
equitable ?
It is a paradox since the expected value is infinite
X
X
1
n
P( stop after n draw) 2n =
2
=
1 = .
n
2
i=1
i=1
i=1
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Saint P
etersbourgs paradox
Many answers have been investigated
the bank does not have infinite liabilities, and thus, the player can play only a
finite time (Buffon (1777), Poisson (1837), Borel (1949)),
the player has a moral utility of money (Cramer(1728), Bernoulli (1738),
von Neumann & Morgenstern (1956)) where a concave utility function is
considered,
the player bets using subjective probabilities, were rare events are assumed to
be impossible (DAlembert (1754), Menger (1934), Yaari (1987))
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Risk measures : the expected utility approach

Z
Ru (X) =
Z
u(x)dP =
P(u(X) > x))dx
where u : [0, ) [0, ) is a utility function.

Example with an exponential utility, u(x) = [1 ex ]/,

1
X
Ru (X) = log EP (e ) .
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Risk measures : Yarris dual approach

Z
Rg (X) =
Z
xdg P =
g(P(X > x))dx
where g : [0, 1] [0, 1] is a distorted function.

Example if g(x) = I(X ) Rg (X) = V aR(X, ), and if g(x) = min{x/, 1}
Rg (X) = T V aR(X, ) (also called expected shortfall),
Rg (X) = EP (X|X > V aR(X, )).
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Yarris dual approach : capacities and Choquets integral

Z
Here Rg (X) =
Z
g(P(X > x))dx =
g(F X (x))dx with g : [0, 1] [0, 1]
increasing. Thus, g F X is a decreasing function taking values in [0, 1] on [0, ) :

g F X is a survival function.
Can Rg (X) be seen as an expected value of X with a change of measure ?
Yes if there exists a probability measure Q such that g F X (x) = Q(X > x). If it
is possible to define such a measure Q, generally Q is not a probability measure.
In fact, Q satisfies
Q() = 0 (since F X () = 0 and g(0) = 0),
Q() = 1 (since F X (0) = 1 and g(1) = 1),
Q(A) Q(B) if A B (since F X () is decreasing and g() is increasing).
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Yarris dual approach : capacities and Choquets integral

Such a measure Q satisfies only Q(A) Q(B) if A B : Q is a capacity.
With this notation,
Z
Rg (X) =
Z
xdg P =
Z
g(P(X > x))dx =
Q(X > x)dx,
but since Q is not a probability measure, Rg () is not an expected value : it is the

so-called Choquets integral.
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Distortion of values versus distortion of probabilities
0.0
0.2
0.4
0.6
0.8
1.0
Calcul de lesperance mathmatique
Fig. 5 Expected value
xdFX (x) =
P(X > x)dx.

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0.0
0.2
0.4
0.6
0.8
1.0
Calcul de lesperance dutilit
Fig. 6 Expected utility
u(x)dFX (x).
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0.0
0.2
0.4
0.6
0.8
1.0
Calcul de lintgrale de Choquet
Fig. 7 Distorted probabilities
g(P(X > x))dx.

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Axiomatic approach for risk measures

There are three way to describe risk measure : characterizing natural properties
that should satisfy
the risk measure R(), e.g. R() is subadditive (R(X + Y ) R(X) + R(Y )),
induced stochastic ordering , i.e. X Y (Y is more risky than X) if and
only if R(X) R(Y ) [Economics],
induced set of acceptable risks A, i.e. X A (X is is acceptable) if and only
if R(X) 0 [Financial Mathematics].
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Ordering and comparing risks

Assume that risks are positive random variables.
The higher R(X), the risker X is. Y will be said to be more risky than X will be
denoted X Y .
In Pascals approach FX (x) = P(X x)
Z
X Y R(X) R(Y ) where R(X) = EP (X) =
xdFX (x).
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More difficult to quantify than to compare

Definition 3. is an ordering relationship if it is reflexive (FX FX ),
transitive (if FX FY and FY FZ then FX FZ ) and antisymmetric (if
FX FY and FY FX then FX = FY ).
Note that the ordering on the set of distribution functions will be extended to
L
the set of positive random variables (with X Y if FX = FY , i.e. X = Y ).

Definition 4. satisfies the additivity axiom if for any risks X, Y and Z such
that X Y , then X + Z Y + Z.
It denotes the invariance of perception in case of a common variation. It might
also be called the linearity axiom.
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More difficult to quantify than to compare

Definition 5. satisfies the continuity axiom (or Archimedean axiom) if for
any FX , FY and FZ such that FX FY FZ , then for all , (0, 1)
FX + [1 ]FZ FY FX + [1 ]FZ .
Proposition 6. If satisfies the continuity and associativity axioms,

X Y R(X) R(Y )
where
Z
R(X) = EP (X) =
Z
xdFX (x) =
P(X > x)dx.

0
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The expected utility approach

In order to answer Saint Petersbourg paradox, one solution, proposed by
Bernoulli was to introduce a moral value of money, i.e. a nonlinear perception
of gains : he suggests to consider log(1 + X) instead of X. The price of the game
was then EP (log(1 + X)). Analogously, Cramèr suggested to consider X, so
that the price was EP ( X).

Hence, the idea was to consider a utility function of gains, u(), which can
change for all players.
Several mathematicians, for example Laplace, discussed the Bernoulli principle
in the following century, and its relevance to insurance systems seems to have
been generally recognized. In 1832, Barrois presented a fairly complete theory of
fire insurance based on Laplaces work on the Bernoulli principle. (Borch
(1974)).
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Definition 7. satisfies the independence axiom if for any distribution function
FX , FY and FZ such that FX FY , then for all [0, 1]
FX + [1 ]FZ FX + [1 ]FZ .
or equivalently
(X) ([1 ]Z) (Y ) ([1 ]Z),
where denotes a mixture.
Hence, ordering are not modified when mixing risks with a third one. Recall that
(X) ([1 ]Z) 6= (X) + ([1 ]Z).
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Example 8. If X, Y are two Bernoulli variables B(2/3) and B(1/3) respectively

, independent,
0 p = 1/3
0 p = 2/3
and Y =
X=
1 p = 2/3
1 p = 1/3

0 p = 1/3 1/2
X p = 1/2
1 p = 2/3 1/2
0 p = 1/2
X Y =
=
=
Y p = 1/2
1 p = 1/2
0 p = 2/3 1/2
1 p = 1/3 1/2
0 + 0 p = 1/3 2/3
0 + 1 p = 1/3 1/3
0 p = 2/9
X +Y =
=
1 p = 5/9
1 + 0 p = 2/3 2/3
2 p = 2/9
1 + 1 p = 2/3 1/3
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Proposition 9. If satisfies the continuity and independence axioms, there

exists a function u with values in R, continuous, strictly increasing, unique up to
an affine transformation, such that
X Y Ru (X) Ru (Y )
where
Z
Ru (X) = EP (u(X)) =
u(x)dFX (x).
Demonstration. von Neumann & Morgenstern (1944) or Fishburn

(1970).
The continuity of u comes from the continuity assumption of the ordering.
If u is concave, the risk taker is said to be risk adverse since (Jensens inequality)
EP (u(X)) u(EP (X)).
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The insurance premium is then obtained by the null utility principle : (X)
satisfies
EP (u((X) X)) = 0.
Example 10. With an exponential utility, u(x) = [1 ex ]/, alors

1
X
(X) = log EP (e ) .
Note that the exponential utility does not exist for heavy tailed risks.
Example 11. With a quadratic utility, u(x) = x x2 /2s where x < s, then
(X) EP (X) + V arP (X).

2
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From expected utility approach to variance

The use of the standard deviation (or variance) as a risk measure can be related
to the theory of utility functions.
Consider Taylors approximation,
u00 [E(X)] V ar(X)
E(u(X)) = u(E(X)) +
+ higher-order terms.
2
In the Gaussian case, those higher terms are identically zero. But for
non-Gaussian random variable X, they can be extremely large, especially if
Taylors expansion can not be used (it is valid only in the neighborhood of the
mean).
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Risk aversion and finance

One can introduce, Arrow-Pratt coefficient of absolute risk aversion,
u00 (x)
xu00 (x)
RA(x) = 0
, and the coefficient of relative risk aversion, RR(x) = 0
u (x)
u (x)
CARA (Constant Absolute Risk Aversion) means that RA() is constant, i.e.
1
u(x) = exp(x).
CRRA (Constant Relative Risk Aversion) means that RA() is constant, i.e.
x1
u(x) =
, for > 0, including the limiting case u(x) = log(x) (when 1.
1
modeling portfolios with Gaussian returns and CARA utility
1
2
Assume that X N (, ) and u(x) = exp(x), for some > 0.
By solving u(EP (X) ) = EP (u(X)), using the expression of the Laplace

transform of the Gaussian distribution,

2
1
1
2
EP (u(X)) = EP (exp(X)) = exp +
,
2
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and
u(EP (X) ) =
1
exp(( )),
2
thus, one gets that = .
2
modeling portfolios with lognormal risks and CRRA utility
1
x
Assume that log X N (, 2 ) and u(x) =
, for some > 0.
1
2
By solving u(EP (X) ) = EP (u(X)), one gets that =
EP (X).
2
quadratic utility principle
If u is quadratic u(x) = x x2 /2s, then

1
1
EP (u(X)) = EP (X) 1 EP (X) V arP (X),
2s
2s
hence only the mean and the variance matter.
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Changing probabilities ?
Question : what is probability P ?
Il y a donc une aversion particulière pour lincertitude liee `
a lignorance. On
prefère avoir un modèle probabiliste que pas de modèle du tout, on prefère evaluer
raisonnablement ses chances de succès, fussent-elles minces, que de nen avoir
aucune idee. (Ekeland (1991)).
Idee de Ramsey (1931), formalisee par Savage (1972) : les individus ne raisonne
pas sous P, la probabilite reelle (inconnue), mais sous une probabilite subjective
Q.
Probl`
eme : difficile destimer une probabilite devènement rare.
Travaux de Selvige (1975) : importance des evènements rares aux consequences
importantes. Approche psychologique du risque : besoin de comparer à des
evènements rares quantifiables (taux de mortalite infantile, quinte flush au
pocker...).
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Definition 12. est une relation verifiant laxiome de monotonie si
P(X + Y ) = 1 implique X Y , pour tout > 0.
Proposition 13. Si est une relation dordre verifiant les axiomes de
continuite, dadditivite et de monotonie, alors il existe une probabilite Q telle que
X Y RQ (X) RQ (Y )
o`
u
Z
RQ (X) = EQ (X) =
Q(X > x)dx.

0
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Using subjective probabilities

Considerons un call europeen, dont le payoff actualise est erT (ST K)+ . Le

rT
prix nest pas EP e
(ST K)+ .
Le prix dun call europeen proposant de toucher (ST K)+ à maturite. La
valorisation de loption, `
a la date daujourdhui est basee sur la notion de
portefeuille de replication : deux portefeuilles offrant le meme payoff à une date
T ont necessairement le meme prix aujourdhui (sinon il serait possible de
constituer une opportunite darbitrage).
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Considerons le modèle de Cox, Ross & Rubinstein (1979), avec un actif sans
risque valant 1 aujourdhui, et 1 + r dans un an, et un actif risque valant S0
aujourdhui, et, dans un an S1 , valant soit Su, soit Sd, avec d < 1 + r < u,
suivant letat de la nature. Considerons un call europeen donnant le droit
dacheter le sous-jacent `
a maturite (dans un an) `
a la valeur K. Le payoff dans un
an est alors (S1 K)+ . Construisons un portefeuille + S0 permettant de
repliquer la valeur de loption dans un an :
si le marche monte, le portefeuille vaudra (1 + r) + Su, et loption
Cu = (Su K)+
si le marche baisse, le portefeuille vaudra (1 + r) + Sd, et loption
Cd = (Sd K)+
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Dans un marche avec absence dopportunite darbitrage, si ces deux produits ont
la meme valeur dans un an, cest donc quils ont le meme prix aujourdhui. Le
portefeuille qui permet de repliquer le payoff de loption est obtenu en resolvant
(1 + r) + Su = C
u
(1 + r) + Sd = Cd
cest a` dire que
1
Cu Cd
et =
=
S0 u S0 d
1+r
Cu Cd
Cu S0 u
S0 u S0 d

.
Notons au passage quil est ainsi toujours possible de constituer un unique

portefeuille de replication.
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Le prix de loption aujourdhui secrit

1
1+rd
u (1 + r)
+ S0 =
Cu +
Cd ,
1+r
ud
ud
qui peut secrire
=
1
1+rd
(qCu + (1 q)Cd ) , o`
uq=
.
1+r
ud
Notons que q [0, 1], cest `

a dire que le prix de loption est lesperance
mathematique, sous une probabilite Q appelee probabilite risque neutre du payoff
à echeance : = EQ (payoff). Notons que Q na rien na voir avec la probabilite
dite historique P qua le sous-jacent de monter ou de descendre : le prix dun
payoff aleatoire X ne secrit pas EP (X).
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Les paradoxes de Allais et Ellsberg

Allais (1953), leffet de certitude ou leffet de securite
Choisir entre les deux lotteries suivantes
Loterie A 100% de chance de recevoir 1 million ,
10% de chance de recevoir 5 millions
Loterie B
89% de chance de recevoir 1 million
1% de chance de ne rien recevoir,

puis entre
Loterie C
Loterie D
11%
89%
10%
90%
de chance de recevoir 1 million

de chance de ne rien recevoir,
de chance de recevoir 5 millions
de chance de ne rien recevoir,
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Preferer A à B, et D à C (observe empiriquement) viole lhypothèse

dindependance (et meme le principe de la chose sre).
Ellsberg (1961), leffet dambiguite
Choisir entre les deux lotteries suivantes
Loterie A win 1000 si la boule tiree est rouge

Loterie B win 1000 si la boule tiree est bleue,
puis entre
Loterie C
Loterie D
win 1000 si la boule tiree nest pas rouge

win 1000 si la boule tiree nest pas bleue,
Preferer A à B, et C à D (observe empiriquement) viole lhypothèse

dindependance (et meme le principe de la chose sre).
65
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La distortion de probabilit
es, Yaari (1987)
Example 14. Un exemple de relation dordre est la dominance stochastique `
a
lordre 1. X 1 Y si et seulement si une des conditions suivantes (equivalentes)
sont satisfaites,
E(g(X)) E(g(Y )) pour g croissante,
pour tout x R, P(X x) P(Y x),
pour tout x R, P(X > x) P(Y > x),
pour tout x ]0, 1[, V aR(X, ) V aR(Y, ).
Cette relation dordre est notee V aR dans Denuit & Charpentier (2004).
Example 15. Un exemple de relation dordre est la dominance stochastique `
a
lordre 2. X 2 Y si et seulement si une des conditions suivantes (equivalentes)
sont satisfaites,
E(g(X)) E(g(Y )) pour g croissante et convexe,
E((X t)+ ) E((YZ t)+ ) pour t R, Z
pour tout x ]0, 1[,
V aR(X, p)dp
0
V aR(Y, p)dp,
0
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pour tout x ]0, 1[,
V aR(X, p)dp
V aR(Y, p)dp,
pour tout x [0, 1[, T V aR(X, ) T V aR(Y, ).

Cette relation dordre est notee T V aR dans Denuit & Charpentier (2004).
Definition 16. est une relation verifiant laxiome dindependance comonotone
si X Y implique X + Z Y + Z pour tout Z tel que les couples (X, Z) et
(Y, Z) soient comonotones.
Remark 17. X et Z sont comonotones sil nexiste pas , 0 tels que
X() > X( 0 ) et Y () < Y ( 0 ).
Definition 18. est une relation verifiant laxiome de coherence si pour des
variables X et Y constantes (P(X = x) = P(Y = y) = 1), FX FY implique
x y.
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Proposition 19. Si est une relation dordre verifiant les axiomes de

continuite, dindependance comonotone, monotonie, et est compatible avec la
dominance stochastique `
a lordre 1, alors il existe une unique fonction de
distortion croissante g : [0, 1] [0, 1] telle que
X Y Rg (X) Rg (Y )
o`
u
Z
Rg (X) =
Z
xdg P =
Z
g(P(X > x))dx =
0
1
1
FX
(1 p)dg(p).
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Coherent risk measures and the axiomatic approach

A risk measure is said to be coherent (from Artzner, Delbaen, Eber &
Heath (1999)) if
R() is monotonic, i.e. X Y implies R(X) R(Y ),
R() is positively homogeneous, i.e. for any 0, R(X) = R(X),
R() is invariant by translation, i.e. for any , R(X + ) = R(X) + ,
R() is subadditive, i.e. R(X + Y ) R(X) + R(Y ).
subadditivity can be interpreted as diversification does not increase risk.
Example : the Expected-Shortfall is coherent, the Value-at-Risk is not.
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Convex risk measures

A risk measure is said to be convex (from Artzner, Delbaen, Eber & Heath
(1999)) if
R() is monotonic, i.e. X Y implies R(X) R(Y ),
R() is invariant by translation, i.e. for any , R(X + ) = R(X) + ,
R() is convex, i.e. R(X + (1 )Y ) R(X) + (1 )R(Y ), for any
[0, 1].
Hence, if a convex measure satisfies the homogeneity condition, it is coherent.
Remark A natural way to define a convex measure satisfying the small size
coherent condition is adding a coherent measure a liquidity charge,
Rconvex (X) = Rcoherent (X) + Cliquidity (X).
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Sets of acceptable risks

Definition 20. Given a risk measure R, a risk X is acceptable if X AR where
AR = {Y X such that R(Y ) 0}.
Conversely,
Theorem 21. Given a set of acceptable risks A, the associated risk measure is
the smallest capital amont m such that X m is acceptable, i.e.
RA (X) = inf{m R such that X m A}.
Then RAR () = R() and ARA = A.
Proposition 22. If R is a convex risk measure, then AR is convex. Conversely,
if A is convex, then RA is a convex risk measure.
Proposition 23. If R is a positively homogeneous risk measure, then AR is a
positive cone. Conversely, if A is a positive cone, then RA is a positively
homogeneous risk measure.
Example 24. If R(X) = sup{X(), }, then AR = {Y, Y 0}. If
1
R(X) = FX
() where (0, 1), then AR = {Y, P(Y 0) }.
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Characterizations of coherent risk measures

Proposition 25. If R is a coherent risk measure, then there exists a set of
probability measures Q such that
R(X) = sup {EQ (X)}.
QQ
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Value-at-Risk : going further

Proposition 26. The Value-at-Risk is (generally) not a coherent risk measure.
If X, Y B(92.5%), independent, then
1.0
1.5
2.0
V ar(X, 90%) + V ar(Y, 90%) = 0 + 0 V ar(X + Y, 90%) = 1.
0.0
0.5
0.80
0.85
0.90
0.95
1.00
Proposition 27. The Value-at-Risk is a coherent risk measure for elliptical

risks.
Proposition 28. For all X, note that
V aR(X, ) = inf{R(X) such that R is coherent and V aR(X, ) R(X)}.
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Tail Value-at-Risk (or Expected Shortfall)

Define
1
T V aR(X, ) = E(X|X > V aR(X, )) =
1
FX 1(u)du.
In some sense, the TailVaR is the average of worst cases, while V aR was the best
worst case.
Proposition 29. Tail Value-at-Risk is a coherent risk measure.
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La Value-at-Risk, ou VaR
Definition 30. La Value-at-Risk est le montant des pertes qui ne doivent pas
etre depassees pour un niveau de confiance donne sur un horizon temporel donne.
On se donne un horizon temporel T et un niveau de confiance ]0, 1[. Soit (Xt )
la valeur dun portefeuille `
a horizon t, alors V aR(XT , ) verifie
P(XT > V aR(XT , )) = 1 .
Cette mesure nest pas (trop) technique et peut meme etre comprise par les
dirigeants dune compagnie bancaire.
Definition 31. La Value-at-Risk pour un niveau de confiance ]0, 1[ et pour
un horizon temporel donne T est le quantile dordre de la distribution de profits
et pertes (profit and loss distribution) `
a horizon T .
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0.1
0.2
Quantile 95% = 1.645
seuil 5%
0.0
Densit de probabilit
0.3
0.4
Si on suppose que XT N (0, 1), alors V aR(XT , ) = 1.645.
Distribution P&L, horizon T
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Par exemple, pour les risques les plus classiques
Market Risk (MR) : = 99%, T = 10 jours
Trading desk limits (MR) : = 95%, T = 1 jour
Credit Risk (CR) : = 99.9%, T = 1 an
Operational Risk (OR) : = 99.9%, T = 1 an
Economic Capital (EC) : = 99.97%, T = 1 an
= Les Value-at-Risk mesurent des quantiles pour des seuils (très) eleves.
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Calcul de VaR, approche r

eglementaire
Les accords de Bale II donne une formule pour calculer le capital economique
pour couvrir son portefeuille actions. Le capital necessaire est alors
(
)
60
X
k
CRt = max V aRt (99%) +
V arti+1 (99%) + CRt? ,
60 i=1
o`
u V aRt (99%) est la Value-at-Risk du portefeuille, sur un horizon de 10 jours,
avec un seuil de 99%, CRt? est un montant de capital pour des risques
specifiques, et k designe un facteur de stress compris entre 2 et 3 (voire 5, qui
doit dependre du backtesting statistique et de la qualite de la methodologie
statistique utilisee).
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Un facteur de stress ?
Pour mieux comprendre lorigine de ce facteur de stress, rappelons quon peut
trouver une borne superieure `
a la VaR en utilisant lingalite de Bienayme
Tchebychev : si X est une variable de variance finie ( 2 < ) et desperance ,
alors pour tout
2
P (|X | ) 2 .
Si X a une distribution symmetrique (ce qui implique entre autres = 0), en

posant = c,
1
P (X c) 2 .
2c
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Un facteur de stress ?
Aussi, si c =
1 ,
1/2, i.e. = 1/2c2 , on obtient une borne pour la VaR à un seuil

P X
2

= P X V aR(1 ) .
Pour = 1%, on obtient c = 7.07 soit V aR(99%) = 7.07. Rappelons que dans le
cas N (0, 2 ), V aR(99%) = 2.33, i.e.
V aR(99%) = 3.04 V aRN (0,2 ) (99%).
Notons que V aR(95%) = 1.92 V aRN (0,2 ) (95%).
80

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trie de la finance (2008/2009)

Master 1, Universite Rennes 1

Premier fil rouge du cours : la VaR

Premier fil rouge du cours : la VaR

Premier fil rouge du cours : la VaR

Second fil rouge du cours : RiskMetrics

Second fil rouge du cours : RiskMetrics

La gestion des risques

History of risk measures

Stock price over 1 year, large volatility

Stock price over 1 year, large volatility

Fig. 1 Random generation of a stock price, dSt = St dt + St dWt .

How to quantify market risks : volatility

Fig. 2 Capital asset pricing model, the mean-variance framework.

A (very) short word on diversification

On the Gaussian distribution

Level curves of a elliptical distribution

Level curves of a spherical distribution

Fig. 3 The Gaussian distribution.

On the Gaussian distribution

Level curves of a elliptical distribution

Density of the Gaussian distribution

Fig. 4 The Gaussian distribution.

The Basel II accord (2004)

The Basel II accord (2004)

Why using VaR as a risk measure ?

Markowitz et lapproche moyenne-variance

Markowitz et lapproche moyenne-variance

Roy et la notion de safety first

Roy et la notion de safety first

Introduction the risk measures, and risk perception

Introduction the risk measures, and risk perception

Risk measures and price of a risk

based on the r`egle des parties.

Risk measures : the expected utility approach

P(u(X) > x))dx

where u : [0, ) [0, ) is a utility function.

Risk measures : Yarris dual approach

g(P(X > x))dx

where g : [0, 1] [0, 1] is a distorted function.

Yarris dual approach : capacities and Choquets integral

g(F X (x))dx with g : [0, 1] [0, 1]

increasing. Thus, g F X is a decreasing function taking values in [0, 1] on [0, ) :

Yarris dual approach : capacities and Choquets integral

Q(X > x)dx,

but since Q is not a probability measure, Rg () is not an expected value : it is the

Distortion of values versus distortion of probabilities

Calcul de lesperance mathmatique

Fig. 5 Expected value

P(X > x)dx.

Distortion of values versus distortion of probabilities

Calcul de lesperance dutilit

Fig. 6 Expected utility

Distortion of values versus distortion of probabilities

Calcul de lintgrale de Choquet

Fig. 7 Distorted probabilities

g(P(X > x))dx.

Axiomatic approach for risk measures

Ordering and comparing risks

More difficult to quantify than to compare

the set of positive random variables (with X Y if FX = FY , i.e. X = Y ).

More difficult to quantify than to compare

Proposition 6. If  satisfies the continuity and associativity axioms,

Proposition 6. If satisfies the continuity and associativity axioms,

Proposition 9. If satisfies the continuity and independence axioms, there

Proposition 19. Si est une relation dordre verifiant les axiomes de