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Does most financial institutions measure risks in terms of https://en.wikipedia.org/wiki/Coherent_risk_measure? Or are they using other/newer theoretical tools?

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    $\begingroup$ The first question is: what risk are we speaking about? $\endgroup$ – Daneel Olivaw Apr 20 at 10:33
  • $\begingroup$ @DaneelOlivaw any risk really , this is an abstract framework where many different but not all kinds of risk fall within $\endgroup$ – Vlad Apr 20 at 11:01
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For example VaR, one of most widely used measure, is not coherent measure because it does not satisfy always sub-additivity property. However, under asumption of a normal distribution, VaR is sub-additive measure.

Since we cannot be sure whether normality assumption is satisfied, we have to combine VaR with other measures, for example CVaR which is sub-additive.

To be more concrete is difficult because each bank/financial institution has its own proprietary models.

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  • $\begingroup$ right, but is the usage of this type of framework widespread? $\endgroup$ – Vlad Apr 20 at 11:00
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    $\begingroup$ @user1: Yes, VaR and CVaR are common measures. $\endgroup$ – Martin Vesely Apr 20 at 11:29
  • $\begingroup$ I just came across a statement that VAR is somewhat wierd as it does not pair well with diversification. Do ppl still use VARs which are not subaddtive despite this? $\endgroup$ – Vlad Jul 2 at 8:33
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I can confirm that for most small/mid sized banks in Germany, VaR is the most popular risk metric out there. While VaR is used for overall bank steering, banks (i.e. traders) use sensitivities (Delta, Gamma, Vega, BPV, Duration etc.) for desk/portfolio steering.

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