Risk-adjusted measures of value creation in financial institutions

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Title: Risk-adjusted measures of value creation in financial institutions
ISBN: 978-952-462-538-8
978-952-462-539-5
Author: Milne, Alistair ; Onorato, Mario
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2009
Series number: 25/2009
Year of publication: 2009
Publication date: 1.9.2009
Published in: Published in European Financial Management, 18. 4 (Sep 2012): 578-601
DOI: 10.1111/j.1468-036X.2010.00540.x
Pages: 37 s.
Keywords: riskit; tuotot; pääoma; rahoituslaitokset; pankkitoiminta; RAROC
Abstract: Measuring value creation by comparing the RAROC of an exposure (the return on risk capital) with a single institution-wide hurdle rate is inconsistent with the standard theory of financial valuation. We use asset pricing theory to determine the appropriate hurdle rate for such a RAROC performance measure. We find that this hurdle rate varies with the skewness of asset returns. Thus the RAROC hurdle rate should differ substantially between equity which has a right skew and debt which has a pronounced left skew and also between different qualities of debt exposure. We discuss implications for financial institution risk management and supervision.
Note: Ilmestynyt myös European Financial Management 2012 ; 18 , 4.
Rights: https://helda.helsinki.fi/bof/copyright


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