Journal of Risk

Cross-border extension, systemic risk and the incorporation of the time dimension into risk assessment are the focus of this issue of The Journal of Risk.

In "Debt-liquidity shock risk: intertemporal effects and probability measures", the first paper in this issue, Bernardo Maggi shows how unique features in the operations of Italian government bond auctions result in characteristics that have not been observed in the well-studied US Treasury bond market. Most prominent is the unexpected initial negative yield differential between off-the-run and on-the-run two-year notes. This observation captures intertemporal aspects of bond liquidity that can be incorporated into the timing and design of auctions for these notes, and this has wide implications because of the significant size of Italian government debt.

In the issue's second paper, "International diversification through iShares and their rivals", Jie Cao, Rao Fu and Yong Jin show that iShares provide lower diversification than closed-end country funds and American depositary receipts. However, the authors show that all three play complementary roles for mean-variance spanning opportunities and, when combined, present a viable substitute for direct foreign investments.

"The temporal dimension of risk", the third paper in this issue, sees Ola Mahmoud formalize a path-dependent risk measure that captures the passage of time as an alternative to assessing risk on only a specific date. Through an illustration on drawdown duration, the author shows how a temporal risk measure captures the larger average duration and duration deviation of bonds relative to equities. This observation contrasts with single-period risk measurement and has strong implications for popular
momentum strategies.

In our fourth and final paper, "Analytical method for computing stressed value-at-risk with conditional value-at-risk", KiHoon Hong develops an analytical approach to estimate stressed value-at-risk (SVaR). This measure is concerned with potential losses when the overall market is distressed. In the paper the author makes use of exposure conditional value-at-risk (CoVaR), a recently introduced measure of systemic risk. Through now-standard risk management validation tests, the author shows how the time series of a portfolio and its correlation with the overall market explicitly affect the effectiveness of SVaR in capturing conditional portfolio risk.

Farid AitSahlia
University of Florida