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This paper aims to provide a new risk measure for portfolio management in Vietnam by incorporating investor’s risk aversion into current risk measures such as value at risk (VaR) and expected shortfall (ES). This measure shares several desirable characteristics with the coherent risk measures, as illustrated in Artzner et al. (1997). | Ho Hong Hai & Nguyen Thi Hoa / Journal of Economic Development, 24(4), 29–45 29 The theory and application of spectral risk measures in Vietnam HO HONG HAI Foreign Trade University – hai.ho@ftu.edu.vn NGUYEN THI HOA Sun Life Vietnam ARTICLE INFO ABSTRACT Article history: This paper aims to provide a new risk measure for portfolio management in Vietnam by incorporating investor’s risk aversion into current risk measures such as value at risk (VaR) and expected shortfall (ES). This measure shares several desirable characteristics with the coherent risk measures, as illustrated in Artzner et al. (1997). In Vietnam, our study makes the first attempt to utilize distortion theory, instead of utility theory, to facilitate the adoption of risk aversion level in the popular risk measures. We find that spectral risk measure is more flexible and effective to different groups of risk-adverse investors, compared to the more monotonic and conventional VaR and ES measures. Received: Oct. 17, 2016 Received in revised form: July 04, 2017 Accepted: Oct. 25, 2017 Keywords: Risk measure Investment portfolio Value-at-Risk Expected shortfall Spectral risk measures Distortion theory 30 1. Ho Hong Hai & Nguyen Thi Hoa / Journal of Economic Development, 24(4), 29–45 Introduction In financial risk management, value at risk (VaR) and expected shortfall (ES) are widely used as measures of risks. However, both VaR and ES fail to explicitly account for investor’s risk appetite even though VaR is more suitable for risk-loving investor and ES matches riskneutral ones (GARP, 2016). As a result, VaR and ES are questionable measures for the predominant group of risk-adverse investors. For this group of investors, the later spectral risk measure (SRM) is more appropriate since it incorporates risk aversion into VaR and ES on the basis of the expected utility theory. However, Dowd et al. (2008) examined SRM based on this theory and found that the application of exponential utility theory
