The risk box is a framework proposed by Alireza Bahiraie et al. (2008). It is a two-dimensional box in which associated with ratio values in which pair values of each risk ratios (Xi, Yi) are represented as Cartesian coordinates. For expositional purposes suppose our proxy for risk chosen is employed by Xi as numerator and Yi as denominator values of Xi/Yi ratio. We can construct a two dimensional box that encapsulates all of these variables for n years. The dimensions of the risk box are generated by the maximum value of either Xi and Yi value during the period of study.
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Precedents
Bahiraie's work built upon mathematical modeling researcher. Since the 1930s there had been numerous research on indicators for prediction and estimations purposes. Bahiraie's work, published in 2008 and 2009, was the first to apply a new geometric approach to predict bankruptcy for a pair-matched sample of firms. Bahiraie's primary improvement was to apply a new mathematical method, which could take into account multiple variables simultaneously and to solve the problems with common indicators.
Novelties and advantages
The risk box has solved main theoretical problems with indicators. The traditional indicators are non-proportion, non-scaled, asymmetric, static, heavy on denominator and low accurate in compare to the risk box method. Risk box satisfies the proportionality effect and proposes scale measure. Risk box provided a symmetric space and it is not heavy on denominator and it can provide a new dynamic measure which is named Dynamic Risk Space (DRS).
Accuracy and effectiveness
In its initial test, the risk box was found to be 87% up to 94.3% accurate in predicting five periods prior to the event, with a Type II error (false positives) of 3% (Bahiraie et al., 2009a, 2009b, 2009c, 2010). That is a self-reported measure, reporting on the performance of the estimated Risk Box in the sample that it was estimated. Since this method is based on the indicators and main issue is to solve the problems occurs with them, there are many applications of this method in Finance, Engineering, Aerospace, Aviation, Social Sciences and any field which concern some kind of indicators. According to provided properties of new Risk Box method and better numerical results in compare to other studies, it is strongly suggested the use of this new methodology for analysis, which provided a conceptual and complimentary methodological solution to many of problems associated with the use of indicators. Alternatively, the Risk Box can be employed as a tool of analysis in providing a crucial first stage for analysing studies associated with changes in risk patterns, in particular those assumed to be linked with finance and engineering. The adaptability of our proposed methodology is emphasised by its applicability for any number of years on sectoral or cross-country studies.
Software
Base on Risk Box and Dynamic Risk Space methodologies, Bahiraie et al. developed new software named DGRSS: Dynamic Geometric Risk Space Software (DGRSS), which provides all the mathematical process and calculations automatically and measures the risk factor by factor (indicators) and ranks the market respectively.