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Risk-adjusted measures of value creation in financial institutions

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journal contribution
posted on 09.07.2014, 10:12 by Alistair Milne, Mario Onorato
Many financial institutions assess portfolio decisions using RAROC, the ratio of expected return to risk (or ‘economic’) capital. We use asset pricing theory to determine the appropriate hurdle rate, finding that this varies with the skewness of asset returns. We quantify this discrepancy under a range of assumptions showing that the RAROC hurdle rate differs substantially, being higher by a factor of five or more for equity which has a right skew compared to debt which has a pronounced left skew, and also between different qualities of debt exposure. We discuss implications for both financial institution risk management and supervision.

History

School

  • Business and Economics

Department

  • Business

Citation

MILNE, A. and ONORATO, M., 2012. Risk-adjusted measures of value creation in financial institutions. European Financial Management, 18 (4), pp. 578 - 601.

Publisher

© Blackwell Publishing Ltd

Version

AM (Accepted Manuscript)

Publication date

2012

Notes

This is the peer reviewed version of the following article: MILNE, A. and ONORATO, M., 2012. Risk-adjusted measures of value creation in financial institutions. European Financial Management, 18 (4), pp. 578 - 601, which has been published in final form at: http://dx.doi.org/10.1111/j.1468-036X.2010.00540.x This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for self-archiving.

ISSN

1354-7798

Language

en

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