Time consistency

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Time consistency is a large question that deals with time and actions in time. The concept means keeping something consistent with time, and it is much broader question than commonly understood. Keeping something consistent with time means not only consistency but controlling the effects of the passage of time as well. Thus the concept deals with control over time.

Time consistency and information economics[edit]

Time consistency is a key concept of information economics. Time consistency in information economics is tied to information theory's key finding that the information value of something is the greater the less of it is known in advance.

Time consistency and financial risk[edit]

Time consistency is also a property in financial risk related to dynamic risk measures. The purpose of the time consistent property is to categorize the risk measures which satisfy the condition that if portfolio (A) is more risky than portfolio (B) at some time in the future, then it is guaranteed to be more risky at any time prior to that point. This is an important property since if it were not to hold then there is an event (with probability of occurring greater than 0) such that B is riskier than A at time although it is certain that A is riskier than B at time . As the name suggests a time inconsistent risk measure can lead to inconsistent behavior in financial risk management.

Mathematical definition[edit]

A dynamic risk measure on is time consistent if and implies .[1]

Equivalent definitions[edit]

For all
For all
Acceptance Set
For all where is the time acceptance set and [2]
Cocycle condition (for convex risk measures)
For all where is the minimal penalty function (where is an acceptance set and denotes the essential supremum) at time and .[3]


Due to the recursive property it is simple to construct a time consistent risk measure. This is done by composing one-period measures over time. This would mean that:

  • [1]


Value at risk and average value at risk[edit]

Both dynamic value at risk and dynamic average value at risk are not a time consistent risk measures.

Time consistent alternative[edit]

The time consistent alternative to the dynamic average value at risk with parameter at time t is defined by

such that .[4]

Dynamic superhedging price[edit]

The dynamic superhedging price is a time consistent risk measure.[5]

Dynamic entropic risk[edit]

The dynamic entropic risk measure is a time consistent risk measure if the risk aversion parameter is constant.[5]

Continuous time[edit]

In continuous time, a time consistent coherent risk measure can be given by:

for a sublinear choice of function where denotes a g-expectation. If the function is convex, then the corresponding risk measure is convex.[6]


  1. ^ a b Cheridito, Patrick; Stadje, Mitja (October 2008). "Time-inconsistency of VaR and time-consistent alternatives" (pdf). Retrieved November 29, 2010. 
  2. ^ Acciaio, Beatrice; Penner, Irina (February 22, 2010). "Dynamic risk measures" (pdf). Retrieved July 22, 2010. 
  3. ^ Föllmer, Hans; Penner, Irina (2006). "Convex risk measures and the dynamics of their penalty functions" (pdf). Statistics and decisions. 24 (1): 61–96. Retrieved June 17, 2012. 
  4. ^ Cheridito, Patrick; Kupper, Michael (May 2010). "Composition of time-consistent dynamic monetary risk measures in discrete time" (pdf). International Journal of Theoretical and Applied Finance. Retrieved February 4, 2011. 
  5. ^ a b Penner, Irina (2007). "Dynamic convex risk measures: time consistency, prudence, and sustainability" (pdf). Retrieved February 3, 2011. 
  6. ^ Rosazza Gianin, E. (2006). "Risk measures via g-expectations". Insurance: Mathematics and Economics. 39: 19–65. doi:10.1016/j.insmatheco.2006.01.002.