Dichotomy of value at risk and prudent value concepts in financial risk management

Анотація

This paper examines two main paradigms of financial risk management, i.e., Value at Risk and Prudent Value. Analyzed are the historical roots of these key concepts, their foundational principles, the main focus of application, and other particulars. Demonstrated is fundamental trade-off between these key risk metrics in financial management as a balance between market sensitivity and its long-term stability. Underlined is also the key role of these risk measures in international financial regulation, including Basel 3.1 Accord and the European Prudent legislation framework. Particular attention was given to a developed stochastic approach to a determination of extreme assets value evolving over time that includes key parameters needed to describe actual market dynamics. In its core model developed integrates the advantages of Value at Risk and prudent Value methodologies, avoiding their main limitations. The model was verified and tested based on processing vast experimental data on residential property market evolution in Ukraine and the United Kingdom

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