NDLI: A framework for assessing comprehensive income risk exposure over varying time horizons

Content Provider	Springer Nature Link
Author	Cataldo, James M.
Copyright Year	2014
Abstract	This paper develops a novel, intertemporal approach to assessing comprehensive income risk exposure. While a large body of accounting and policy literature focuses on quality and reliability attributes, the present study employs the premise that fair value and comprehensive income are perfectly measured at all times. In this framework, the context-sensitive impacts of comprehensive income volatility stem from the structure and dynamics of the value generation process rather than variations in measurement quality. These impacts occur concurrently with measurement related effects, but are treated as conceptually distinct. The results illustrate how factors such as risk horizon, trading frequency, and portfolio composition can affect the severity of risk exposure over time. Applied to patterns of unrealized fair-value changes in US bank available-for-sale portfolios, the model significantly improves on the most widely accepted convention for multiperiod risk aggregation (the so-called square-root-of-time or “sqrt(t)” rule). The proposed approach has direct application to value-at-risk and stress-test methods estimates that use horizon-dependent volatilities as inputs. From a financial reporting standpoint, the proposed framework affirms the utility of the “mixed measurement” accounting model and supports multifaceted or “dual presentation” approaches to financial statements.
Starting Page	819
Ending Page	844
Page Count	26
File Format	PDF
ISSN	0924865X
Journal	Review of Quantitative Finance and Accounting
Volume Number	45
Issue Number	4
e-ISSN	15737179
Language	English
Publisher	Springer US
Publisher Date	2014-05-23
Publisher Place	New York
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Risk assessment Comprehensive income Fair value Simulation Finance/Investment/Banking Accounting/Auditing Econometrics Operations Research/Decision Theory
Content Type	Text
Resource Type	Article
Subject	Finance Accounting

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