A framework for assessing comprehensive income risk exposure over varying time horizons

Cataldo, James
November 2015
Review of Quantitative Finance & Accounting;Nov2015, Vol. 45 Issue 4, p819
Academic Journal
This paper develops a novel, intertemporal approach to assessing comprehensive income risk exposure. While a large body of accounting and policy literature focuses on quality and reliability attributes, the present study employs the premise that fair value and comprehensive income are perfectly measured at all times. In this framework, the context-sensitive impacts of comprehensive income volatility stem from the structure and dynamics of the value generation process rather than variations in measurement quality. These impacts occur concurrently with measurement related effects, but are treated as conceptually distinct. The results illustrate how factors such as risk horizon, trading frequency, and portfolio composition can affect the severity of risk exposure over time. Applied to patterns of unrealized fair-value changes in US bank available-for-sale portfolios, the model significantly improves on the most widely accepted convention for multiperiod risk aggregation (the so-called square-root-of-time or 'sqrt( t)' rule). The proposed approach has direct application to value-at-risk and stress-test methods estimates that use horizon-dependent volatilities as inputs. From a financial reporting standpoint, the proposed framework affirms the utility of the 'mixed measurement' accounting model and supports multifaceted or 'dual presentation' approaches to financial statements.


Related Articles

  • What Drives Short Rate Dynamics? A Functional Gradient Descent Approach. Audrino, Francesco // Computational Economics;Mar2012, Vol. 39 Issue 3, p315 

    Functional gradient descent (FGD), a recent technique coming from computational statistics, is applied to the estimation of the conditional moments of the short rate process with the goal of finding the main drivers of the drift and volatility dynamics. FGD can improve the accuracy of some...

  • Foreign Exchange Market Volatility in Southeast Asia. Wang, Peijie; Wang, Ping // Asia-Pacific Financial Markets;Sep1999, Vol. 6 Issue 3, p235 

    The time-varying volatility and volatility transmission in Asian foreign exchange markets are investigated in this paper. It has been found that the time-varying volatility and volatility transmission are all prominent in these markets. Moreover, variance simulation is carried out and the...

  • The Time-Varying Beveridge Curve. Benati, Luca; Lubik, Thomas A. // Working Papers Series (Federal Reserve Bank of Richmond);Aug2013, Vol. 13 Issue 12, preceding p1 

    We use a Bayesian time-varying parameter structural VAR with stochastic volatility to investigate changes in both the reduced-form relationship between vacancies and the unemployment rate, and in their relationship conditional on permanent and transitory output shocks, in the post-WWII United...

  • Editorial for the Special Issue: Quantitative Methods in Banking and Finance. Gaganis, Chrysovalantis; Zopounidis, Constantin; Doumpos, Michael // Computational Economics;Mar2013, Vol. 41 Issue 3, p297 

    No abstract available.

  • Is There Volatility Convergence in Asia-Pacific Securitized Real Estate Markets? Liow, Kim; Chen, Wei // Journal of Real Estate Finance & Economics;Aug2013, Vol. 47 Issue 2, p370 

    We assess whether a group of eight Asia-Pacific securitized real estate markets display similar volatility trend over the past 15 years, 1995-2009, using an econometric model that incorporates common volatility effects across the sample markets. The empirical results indicate the presence of at...

  • Stock market return and volatility: day-of-the-week effect. Berument, M.; Dogan, Nukhet // Journal of Economics & Finance;Apr2012, Vol. 36 Issue 2, p282 

    This paper examines the stock market returns and volatility relationship using US daily returns from May 26, 1952 to September 29, 2006. The empirical evidence reported here does not support the proposition that the return-volatility relationship is present and the same for each day of the week.

  • Cointegration relationship and time varying co-movements among Indian and Asian developed stock markets Gupta, Rakesh; Guidi, Francesco // International Review of Financial Analysis;Jan2012, Vol. 21, p10 

    Abstract: This paper aims to explore links between the Indian stock market and three developed Asian markets (i.e. Hong Kong, Japan and Singapore) using cointegration methodologies in order to explore interdependence. We further estimate the time-varying conditional correlation relationships...

  • Empirical Evidence on Time-Varying Hedging Effectiveness of Emissions Allowances under Departures from the Cost-of-Carry Theory. Kai Chang // Discrete Dynamics in Nature & Society;2013, p1 

    Under departures from the cost-of-carry theory, traded spot prices and conditional volatility disturbed from futures market have significant impacts on futures price of emissions allowances, and then we propose time-varying hedge ratios and hedging effectiveness estimation using ECM-GARCH model....

  • Aggregate volatility expectations and threshold CAPM. Arısoy, Yakup Eser; Altay-Salih, Aslıhan; Akdeniz, Levent // North American Journal of Economics & Finance;Nov2015, Vol. 34, p231 

    We propose a volatility-based capital asset pricing model (V-CAPM) in which asset betas change discretely with respect to changes in investors’ expectations regarding near-term aggregate volatility. Using a novel measure to proxy uncertainty about expected changes in aggregate volatility,...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics