Measures of Contribution for Portfolio Risk

A fundamental problem that we have mentioned is that one should invest first of all in Risk Management. This question can be seen from different point of views, including clients of a financial institution, its stockholders, administrators, directors, regulatory authorities, politicians or public sector in general. Everyone of these agents may have a different answer and by the end of the day it must be found a break event point among various interests. Modern society hopes in an incentive bank and insurance system and in a common interest on stability of it. The regulator process ended to Basle II was strongly motivated by the fear of systematic risk. Society sees risk management positively and asks to regulators to create a framework that guarantee its interests. We can consider the debate on use and abuse of derivatives. Authorities help to decrease the risk of a bad usage of such products but in the same time recognizes their value in the global financial system. Perhaps, contrary to popular vision, derivatives should be seen as instruments that increase stability of markets instead of undermine.
It is well-known that a good risk management can add value to a firm so shareholders' value. In fact, this is the principal reason why firms that are not controlled by the regulatory authorities invest in risk management activities.
Understanding the relation existing between shareholders' value and financial risk management has also important consequences for the development of risk management process. Questions that need answers are:
- Why risk management adds value to the firm and which risks must be manage?
- How risk management should act for investment choices and balance budget?
There exists a huge literature on corporate finance on the problem/corporate risk management and shareholders' value". We have to notice that it is not obvious an increase in shareholders' value in a completely efficient markets world: while individuals are typically adverse to risk and should manage risk of their portfolio, it is not clear if the reduction of risk at corporate level (as for example the hedging of currency risk or the detention of some amount of debt) increases value of the firm. A rational explanation is simple: if investors can access to perfect capital markets they can simply manage risks making use of trading and diversification.