Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212146 
Year of Publication: 
2009
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 25/2009
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Measuring value creation by comparing the RAROC of an exposure (the return on risk capital) with a single institution-wide hurdle rate is inconsistent with the standard theory of financial valuation. We use asset pricing theory to determine the appropriate hurdle rate for such a RAROC performance measure. We find that this hurdle rate varies with the skewness of asset returns. Thus the RAROC hurdle rate should differ substantially between equity which has a right skew and debt which has a pronounced left skew and also between different qualities of debt exposure. We discuss implications for financial institution risk management and supervision.
Persistent Identifier of the first edition: 
ISBN: 
978-952-462-539-5
Document Type: 
Working Paper

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