Imprecise previsions for risk measurement

  • Authors:

  • Renato Pelessoni;Paolo Vicig

  • Affiliations:

  • Dipartimento di Matematica Applicata 'B. de Finetti', University of Trieste, Piazzale Europa 1, Trieste, I-34127, Italy;Dipartimento di Matematica Applicata 'B. de Finetti', University of Trieste, Piazzale Europa 1, Trieste, I-34127, Italy

  • Venue:
  • International Journal of Uncertainty, Fuzziness and Knowledge-Based Systems
  • Year:
  • 2003

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Abstract

In this paper the theory of coherent imprecise previsions is applied to risk measurement. We introduce the notion of coherent risk measure defined on an arbitrary set of risks, showing that it can be considered a special case of coherent upper prevision. We also prove that our definition generalizes the notion of coherence for risk measures defined on a linear space of random numbers, given in literature. Consistency properties of Value-at-Risk (VaR), currently one of the most used risk measures, are investigated too, showing that it does not necessarily satisfy a weaker notion of consistency called 'avoiding sure loss'. We introduce sufficient conditions for VaR to avoid sure loss and to be coherent. Finally we discuss ways of modifying incoherent risk measures into coherent ones.