European Financial Management version 2.pdf (272.19 kB)
Risk-adjusted measures of value creation in financial institutions
journal contribution
posted on 2014-07-09, 10:12 authored by Alistair MilneAlistair Milne, Mario OnoratoMany 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 LtdVersion
- AM (Accepted Manuscript)
Publication date
2012Notes
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
1354-7798Publisher version
Language
- en