Journal of Risk

Risk attribution among a system of interacting economic units and risk measure assessment with a view toward capital allocation are addressed in this issue of The Journal of Risk. Additionally, we consider topics associated with the behavior of portfolio managers: specifically, stop outs and bonuses.

Negative risk components arise within systems of interacting economic units, where some reduce the risk generated by others in certain scenarios. In order to obtain nonnegative risk components, the standard method is to replace negative risk components with zero and rescale appropriately. As an alternative, in the issue's first paper, "Nonnegative risk components", Jeremy Staum proposes an approach based on cooperative game theory, which provides an advantage with regard to properties such as separability, diversification and monotonicity.

In our second paper, "What is the best risk measure in practice? A comparison of standard measures", Susanne Emmer, Marie Kratz and Dirk Tasche compare the most common risk measures on the basis of desirable features, such as coherence, comonotonic additivity, robustness and elicitability, as well as their impact on capital allocation. The authors find that expected shortfall offers the best compromise among these different criteria, despite its shortcomings regarding estimation and backtesting.

"Stop-outs under serial correlation and the triple penance rule", by David H. Bailey and Marcos López de Prado, is our third paper. It concerns stopping out (or discontinuing) an investment strategy with rules that must discern between bad luck and poor choice. The authors develop closed-form expressions to estimate loss quantiles and time-under-water quantiles that do not require the assumption of independent and identically distributed cashflows. In particular, under standard portfolio theory assumptions, they estimate that it takes three times longer to recover from an expected
loss quantile than to generate it.

Finally, in our fourth paper, "Does bonus deferral reduce risk-taking?", Dietmar P. J. Leisen tackles the interplay between risk-taking and incentives. Specifically, he shows through a dynamic model that bonus deferral increases risk-taking for extreme (large or small) realized asset values; for others value in between, risk-taking decreases, but only if the ratio of the deferred portion to shortfall is below a critical value.

Farid AitSahlia
University of Florida