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Optimal security investments and extreme risk
1University of Wisconsin, Milwaukee, WI, USA. mohtadi@umn.edu
Summary
Firms can optimize security investments against catastrophic risks by determining optimal amounts and timing. This strategy, informed by extreme value theory (EVT), offers an alternative to catastrophic risk insurance.
Area of Science:
- Risk Management
- Financial Modeling
- Security Economics
Background:
- Post-9/11 security concerns heightened for public and private sectors.
- Lack of clear algorithms for optimal security investment timing and amount.
- Need for strategies to mitigate catastrophic risk impacts on businesses.
Purpose of the Study:
- To develop an optimal investment strategy for firms facing catastrophic risks.
- To determine the ideal amount and timing for security investments.
- To evaluate whether postponing risk mitigation decisions is optimal.
Main Methods:
- Development and estimation of one-period and multiperiod models.
- Utilizing extreme value theory (EVT) for risk analysis.
- Calibration using probability measures for catastrophic terrorism risks in the food sector.
Main Results:
- Models provide a framework for optimal security investment decisions.
- Analysis indicates optimal timing and amount for mitigating catastrophic risks.
- Comparison of the devised strategy against purchasing catastrophic risk insurance.
Conclusions:
- The study offers a data-driven approach to security investment strategy.
- EVT-based models can guide firms in managing extreme risks.
- The findings provide valuable insights for businesses, particularly in the food sector, regarding risk mitigation and insurance.
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