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This Technical Document provides a detailed description
of RiskMetrics, a set of techniques and data to measure market
risks in portfolios of fixed income instruments, equities, foreign
exchange, commodities, and their derivatives issued in over 30
countries. This edition has been expanded significantly from the
previous release issued in May 1995.
We make this methodology and the corresponding RiskMetrics
data sets available for three reasons:
- We are interested in promoting greater transparency of market
risks. Transparency is the key to effective risk management.
- Our aim has been to establish a benchmark for market risk
measurement. The absence of a common point of reference for market
risks makes it difficult to compare different approaches to and
measures of market risks. Risks are comparable only when they are
measured with the same yardstick.
- We intend to provide our clients with sound advice, including
advice on managing their market risks. We describe the RiskMetrics
methodology as an aid to clients in understanding and evaluating
that advice.
Both J.P. Morgan and Reuters are committed to further the
development of RiskMetrics as a fully transparent set of risk
measurement methods. We look forward to continued feedback on how
to maintain the quality that has made RiskMetrics the benchmark for
measuring market risk. RiskMetrics is based on, but differs
significantly from, the risk measurement methodology developed by
J.P. Morgan for the measurement, management, and control of market
risks in its trading, arbitrage, and own investment account
activities. We remind our readers that no amount of
sophisticated analytics will replace experience and professional
judgment in managing risks. RiskMetrics is nothing more than a
high-quality tool for the professional risk manager involved in the
financial markets and is not a guarantee of specific results.
- J.P. Morgan and Reuters have teamed up to enhance RiskMetrics .
Morgan will continue to be responsible for enhancing the methods
outlined in this document, while Reuters will control the
production and distribution of the RiskMetrics data sets.
- Expanded sections on methodology outline enhanced analytical
solutions for dealing with nonlinear options risks and introduce
methods on how to account for non-normal distributions.
- Enclosed diskette contains many examples used in this document.
It allows readers to experiment with our risk measurement
techniques.
- All publications and daily data sets are available free of
charge on J.P. Morgan's Web page on the Internet. This page is
accessible directly or through third party services such as
CompuServe or America Online.
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