Data Management Investigate

Risk-Adjusted Measures Of Value Creation In Financial Institutions

Download now Free registration required

Executive Summary

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. The authors use asset pricing theory to determine the appropriate hurdle rate for such a RAROC performance measure. They 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. They discuss implications for financial institution risk management and supervision.

  • Format: PDF
  • Size: 1064.96 KB