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Title: Risk-adjusted measures of value creation in financial institutions
Authors: Milne, Alistair
Onorato, Mario
Keywords: Asset pricing
Banking
Capital allocation
Capital budgeting
Issue Date: 2012
Publisher: © Blackwell Publishing Ltd
Citation: MILNE, A. and ONORATO, M., 2012. Risk-adjusted measures of value creation in financial institutions. European Financial Management, 18 (4), pp. 578 - 601.
Abstract: Many financial institutions assess portfolio decisions using RAROC, the ratio of expected return to risk (or ‘economic’) capital. We use asset pricing theory to determine the appropriate hurdle rate, finding that this varies with the skewness of asset returns. We quantify this discrepancy under a range of assumptions showing that the RAROC hurdle rate differs substantially, being higher by a factor of five or more for equity which has a right skew compared to debt which has a pronounced left skew, and also between different qualities of debt exposure. We discuss implications for both financial institution risk management and supervision.
Description: This is the peer reviewed version of the following article: MILNE, A. and ONORATO, M., 2012. Risk-adjusted measures of value creation in financial institutions. European Financial Management, 18 (4), pp. 578 - 601, which has been published in final form at: http://dx.doi.org/10.1111/j.1468-036X.2010.00540.x This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for self-archiving.
Version: Accepted for publication
DOI: 10.1111/j.1468-036X.2010.00540.x
URI: https://dspace.lboro.ac.uk/2134/15155
Publisher Link: http://dx.doi.org/10.1111/j.1468-036X.2010.00540.x
ISSN: 1354-7798
Appears in Collections:Published Articles (Business School)

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