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RM2006, The RiskMetrics 2006 Methodology

categories: Technical Document, general

Since the publication of the RiskMetrics Methodology in 1994, RiskMetrics Group research has set the standard for financial risk management, defining the way risk is measured and managed.

The original (open-source) RiskMetrics Methodology has been proven and time tested in an everchanging financial market as the foundation of risk measurement, and is widely recognized by risk practitioners and regulators as the language of risk. With the benefit of more sophisticated knowledge of financial data, RiskMetrics Group has completely revisited the foundations of its risk framework and is pleased to introduce RiskMetrics 2006.

A New and Enhanced Methodology

Building upon the strengths of the original RiskMetrics Methodology, RiskMetrics 2006 (RM2006):

  • Measures risk across a broad range of risk horizons
  • Is effective for both absolute and relative risk analysis
  • Increases accuracy of risk evaluations
  • Is robust, having been extensively back-tested, especially for long-term horizons
  • Is applicable across a wide range of assets
  • Can be consistently and quickly implemented by market risk practitioners

The Main Components of RM2006

The performance of a risk methodology depends heavily on two major ingredients: a volatility forecast up to the desired risk horizon, and the probability distribution for the volatility-discounted returns.

RM2006 uses a volatility forecast derived from a long-memory autoregressive conditional heteroskedastic (LM-ARCH) process, and a distribution that accurately captures fat tails for the residuals.

Downloads

A Gentle Introduction to the RiskMetrics 2006 Methodology
An abbreviated description of a new risk methodology incorporating state-of-the-art
knowledge about financial time series.
Back testing risk methodologies from 1 day to 1 year
A systematic back testing study covering all geographic areas and asset classes,
from time horizons of one day to one year.
RiskMetrics 2006 Methodology (RM2006)
The full research document about the new and enhanced RiskMetrics risk framework


Download file

RM2006_introduction.pdf
RM2006.pdf