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Quantitative Risk Management WS1920 Assignment 2

This document provides exercises for a quantitative risk management class. It includes 4 exercises exploring properties of risk measures like VaR, AVaR, and expectiles. The exercises will take place on November 19, 2019 in two classrooms for two groups of students. Students are instructed to attempt the exercises at home before the scheduled class.

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Ka Wing Ho
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62 views2 pages

Quantitative Risk Management WS1920 Assignment 2

This document provides exercises for a quantitative risk management class. It includes 4 exercises exploring properties of risk measures like VaR, AVaR, and expectiles. The exercises will take place on November 19, 2019 in two classrooms for two groups of students. Students are instructed to attempt the exercises at home before the scheduled class.

Uploaded by

Ka Wing Ho
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chair of Mathematical Finance

Department of Mathematics
Technical University of Munich
Quantitative Risk Management
Prof. Dr. Matthias Scherer and Henrik Sloot

Exercise sheet 2
The exercise is held at November 19, 2019 in room BC2 0.01.04 (group 1) and BC2 0.01.05 (group
2). You should try to solve the exercises at home before the exercise.

Exercise 2.1
Let A be a non-empty subset of X , the space of bounded financial positions, which satisfies

inf m ∈ R m ∈ A > −∞ (2.1a)

and

X ∈ A, Y ∈ X , Y ≥ X ⇒ Y ∈ A. (2.1b)

Define ρA : X → R by
ρA (X) := inf {m ∈ R|m + X ∈ A}, X ∈ X.
a) Show that ρA is a monetary risk measure.
b) Show that A ⊆ AρA with AρA := {X ∈ X |ρA (X) ≤ 0}.
c) Show that the map X 7→ ρA (X) is Lipschitz continuous with constant 1 w.r.t. to the k·k∞ norm.
d) Show that A = AρA if and only if A is k·k∞ -closed in X , where k·k∞ denotes the supremums norm.

Exercise 2.2
Consider the linear subspace X0 ⊂ X of normally distributed random variables (financial positions)
2
X ∼ N (µ(X), σ(X) ), µ(X) ∈ R, σ(X) ∈ R+ . Show that VaRλ , λ ∈ (0, 21 ], is a coherent risk measure if
restricted to the Gaussian subspace X0 .

Exercise 2.3
Let X ∈ X = L0 (Ω, F, P) be a financial position such that −X is the loss due to operational risk.
a) Compute VaRλ and AVaRλ , λ ∈ (0, 1), for the exponential distribution with

F−X (x) = 1 − e−γx , x ≥ 0 and γ > 0.

b) Compute VaRλ and AVaRλ , λ ∈ (0, 1), for the generalised Pareto distribution with
− ξ1
F−X (x) = 1 − (1 + ξx) , x ≥ 0 and 0 < ξ < 1.

Exercise 2.4
In the statistics literature Newey and Powell defined the expectile eα as
(
(1 − α)t2 t < 0,
eα(X) = argminc∈R E[fα (X − c)], fα (t) =
αt2 t ≥ 0.


c Technical University of Munich, Chair of Mathematical Finance
2

In actuarial sciences, this is a popular risk measure. Let E[|X|] < ∞. Show that the expectile fulfils the
following properties:

X ≤ Y ⇒ eα (X) ≤ eα (Y ), (Monotonicity)
eα (X + m) = eα (X) + m, (Cash invariance)
eα (λX + (1 − λ)Y ) ≤ λeα (X) + (1 − λ)eα (Y ), (Convexity)
eα (λX) = λeα (X), λ > 0. (Positive homogeneity)

Remark. The definition in Exercise (4) is the definition of a coherent risk measure used in the actuarial
science context. Note that there is a sign change involved in the monotonicity and cash invariance properties,
as in the actuarial sciences one is interested in the loss L = −X, whereas in the lecture we are concerned
with the net worth X of a financial position. Bearing this in mind, the above definition is indeed equivalent
to Definition 4 of the lecture, cf. Remark 1.

Quantitative Risk Management — Exercise sheet 2


The exercise is held at November 19, 2019 in room BC2 0.01.04 (group 1) and BC2 0.01.05 (group 2). You
should try to solve the exercises at home before the exercise.

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