Multi dimensional Risk Management

Many ERM programs are one dimensional. They look at VaR or they look at Economic Capital. The Multi-dimensional Risk manager consider volatility, ruin, and everything in between. They consider not only types of risk that are readily quantifiable, but also those that may be extremely difficult to measure. The following is a partial listing of the risks that a multidimensional risk manager might examine:
o Type A Risk – Short-term volatility of cash flows in one year
o Type B Risk – Short-term tail risk of cash flows in one year
o Type C Risk – Uncertainty risk (also known as parameter risk)
o Type D Risk – Inexperience risk relative to full multiple market cycles
o Type E Risk – Correlation to a top 10
o Type F Risk – Market value volatility in one year
o Type G Risk – Execution risk regarding difficulty of controlling operational losses
o Type H Risk – Long-term volatility of cash flows over five or more years
o Type J Risk – Long-term tail risk of cash flows over 5 five years or more
o Type K Risk – Pricing risk (cycle risk)
o Type L Risk – Market liquidity risk
o Type M Risk – Instability risk regarding the degree that the risk parameters are stable

Many of these types of risk can be measured using a comprehensive risk model, but several are not necessarily directly measurable. But the muilti dimensional risk manager realizes that you can get hurt by a risk even if you cannot measure it.

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Explore posts in the same categories: Assumptions, Basis Risk, Correlation, Counterparty Risk, ERM, Execution Risk, Modeling, Risk, Risk Management, Tail Risk, Uncertainty, Value at Risk, VaR, Volatility

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One Comment on “Multi dimensional Risk Management”

  1. PSI Says:

    very interesting article to know about the multi-dimensional risks. Here they have given the partial listing of the risks that a multidimensional risk manager might examine.

    http://www.ermsummit.com

    http://www.gsmiweb.com


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