Is volatility really a coherent risk measure?

Question

Why people say that volatility is a coherent risk measure?

I don't see it clearly because what happen if the two assets are correlated positively? subadditivity would not be preserved.

That affirmation is in some papers online or even in this question

SRKX · Accepted Answer · 2014-11-28 04:06:56Z

3

Well, if you assume $X$ has volatility $\sigma_X$ and $Y$ has volatility $\sigma_Y$, then

$$\sigma_{X+Y} = \sqrt{ Var( X + Y) } = \sqrt{ \sigma_X^2+\sigma_Y^2 + 2 \sigma_X \sigma_Y \rho }$$

Then, you want to show

$$ \sigma_{X+Y} = \sqrt{ \sigma_X^2+\sigma_Y^2 + 2 \sigma_X \sigma_Y \rho } \leq \sigma_X + \sigma_Y $$

Squaring both sides:

$$\sigma_X^2+\sigma_Y^2 + 2 \sigma_X \sigma_Y \rho \leq \sigma_X^2 + \sigma_Y^2 + 2 \sigma_X \sigma_Y $$

Given the fact that, by definition, $\sigma_X \geq 0$, $\sigma_Y \geq 0$ and $\rho \in [ -1, 1]$, it looks to me that the property holds.

answered Nov 28, 2014 at 4:06

SRKX

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$\begingroup$ Was a confusion from my part. If one would like to define a measure of risk as the variance, then that not be a coherent risk measure. Thanks $\endgroup$
– rlartiga
Commented Nov 28, 2014 at 4:14
$\begingroup$ This answer on subadditivity is great. But doesn't volatility lack the property of translation invariance and therefore it is not coherent? $\endgroup$
– Richi Wa
Commented Nov 28, 2014 at 7:58
$\begingroup$ To show coherence, all 4 properties must be checked. en.wikipedia.org/wiki/Coherent_risk_measure#Properties $\endgroup$
– emcor
Commented Nov 28, 2014 at 10:36

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