On measures of financial risk

Traditional measures of financial risk (e.g., the standard deviation, Value-at- Risk (VaR), conditional Value-at-Risk (CVaR)) are widely used by banks when deciding on the amount of capital they need to set aside in order to offset the market risk. However, the traditional risk measures appear static; they barely change with the inflow of new data. Dynamic risk measures look capable of indicating increased risk on the eve of a sharp market movement. However, they swing too widely to be used when deciding on the amount of the capital reserve. We argue that a combination of static and dynamic risk measures may serve the purpose, staying conservative in normal situations and suggesting the increase of the amount of the capital reserve during volatile periods