The RiskMetrics 2006 Methodology
RiskMetrics Methodologies--The Standard for Financial Risk Management
Since the publication of the RiskMetrics Methodology in 1994, RiskMetrics
Group research has set the
standard for financial risk management, defining the way risk is measured and
managed.
The original (open-source) RiskMetrics Methodology has been proven and time
tested in an everchanging
financial market as the foundation of risk measurement, and is widely recognized
by risk
practitioners and regulators as the language of risk. With the benefit of more
sophisticated knowledge
of financial data, RiskMetrics Group has completely revisited the foundations
of its risk framework and is pleased to introduce RiskMetrics 2006.
A New and Enhanced Methodology
Building upon the strengths of
the original RiskMetrics Methodology, RiskMetrics 2006 (RM2006):
- Measures risk across a broad range of risk
horizons
- Is effective for both absolute and relative risk analysis
- Increases accuracy
of risk evaluations
- Is robust, having been extensively back-tested, especially
for long-term horizons
- Is applicable across a wide range of assets
- Can be consistently and quickly
implemented by market risk practitioners
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The Main Components of RM2006
The performance of a risk methodology depends heavily
on two major ingredients: a volatility forecast up to the
desired risk horizon, and the probability distribution for
the volatility-discounted returns.
RM2006 uses a volatility forecast derived from a long-memory
autoregressive conditional heteroskedastic (LM-ARCH) process,
and a distribution that accurately captures fat tails for the
residuals.
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Brochure:
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