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Comparative Analyses of Expected Shortfall and Value-at-Risk (2): Expected Utility Maximization and Tail Risk

Author

Listed:
  • Yamai, Yasuhiro

    (Bank of Japan)

  • Yoshiba, Toshinao

    (Bank of Japan)

Abstract

We compare expected shortfall and value-at-risk (VaR) in terms of consistency with expected utility maximization and elimination of tail risk. We use the concept of stochastic dominance in studying these two aspects of risk measures. We conclude that expected shortfall is more applicable than VaR in those two aspects. Expected shortfall is consistent with expected utility maximization and is free of tail risk, under more lenient conditions than VaR.

Suggested Citation

  • Yamai, Yasuhiro & Yoshiba, Toshinao, 2002. "Comparative Analyses of Expected Shortfall and Value-at-Risk (2): Expected Utility Maximization and Tail Risk," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(2), pages 95-115, April.
    • Handle: RePEc:ime:imemes:v:20:y:2002:i:2:p:95-115
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    File URL: http://www.imes.boj.or.jp/research/papers/english/me20-2-4.pdf
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    Cited by:

    1. Chang, Chia-Lin & Jimenez-Martin, Juan-Angel & Maasoumi, Esfandiar & McAleer, Michael & Pérez-Amaral, Teodosio, 2019. "Choosing expected shortfall over VaR in Basel III using stochastic dominance," International Review of Economics & Finance, Elsevier, vol. 60(C), pages 95-113.
    2. Chia-Lin Chang & Juan-Ángel Jiménez-Martín & Esfandiar Maasoumi & Michael McAleer & Teodosio Pérez-Amaral, 2015. "A Stochastic Dominance Approach to the Basel III Dilemma: Expected Shortfall or VaR?," Tinbergen Institute Discussion Papers 15-056/III, Tinbergen Institute.
    3. Cotter, John & Dowd, Kevin, 2007. "Evaluating the Precision of Estimators of Quantile-Based Risk Measures," MPRA Paper 3504, University Library of Munich, Germany.
    4. Iulia Lupu & Ana Barbara Bobirca & Paul Gabriel Miclaus & Tudor Ciumara, 2020. "Risk Management of Companies Included in the EURO STOXX Sustainability Index. An Investors' Perception," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 22(55), pages 707-707, August.
    5. Annalisa Di Clemente, 2019. "Comparing Different Systemic Risk Measures for European Banking System," International Business Research, Canadian Center of Science and Education, vol. 12(1), pages 35-53, January.
    6. Basu, Anup K. & Drew, Michael E., 2010. "The appropriateness of default investment options in defined contribution plans: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 18(3), pages 290-305, June.
    7. Fermanian, Jean-David & Scaillet, Olivier, 2005. "Sensitivity analysis of VaR and Expected Shortfall for portfolios under netting agreements," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 927-958, April.
    8. David Grossmann & Peter Scholz, 2019. "The golden rule of banking: funding cost risks of bank business models," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(2), pages 174-196, June.
    9. Yamai, Yasuhiro & Yoshiba, Toshinao, 2005. "Value-at-risk versus expected shortfall: A practical perspective," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 997-1015, April.
    10. Christian Gourieroux & Wei Liu, 2006. "Efficient Portfolio Analysis Using Distortion Risk Measures," Working Papers 2006-17, Center for Research in Economics and Statistics.
    11. Osmundsen, Kjartan Kloster, 2018. "Using expected shortfall for credit risk regulation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 80-93.
    12. Peter J. Barry & Bruce J. Sherrick & Jianmei Zhao, 2009. "Integration of VaR and expected utility under departures from normality," Agricultural Economics, International Association of Agricultural Economists, vol. 40(6), pages 691-699, November.
    13. Brandtner, Mario & Kürsten, Wolfgang, 2017. "Consistent modeling of risk averse behavior with spectral risk measures: Wächter/Mazzoni revisited," European Journal of Operational Research, Elsevier, vol. 259(1), pages 394-399.
    14. Semih Atakan & Kerem Bülbül & Nilay Noyan, 2017. "Minimizing value-at-risk in single-machine scheduling," Annals of Operations Research, Springer, vol. 248(1), pages 25-73, January.
    15. Duc Hong Vo & Quang Van Tuan & Trung Vu-Thanh Pham, 2019. "Sectoral Risks in Vietnam and Malaysia A Comparative Analysis," Advances in Decision Sciences, Asia University, Taiwan, vol. 23(1), pages 62-87, March.
    16. Marzia De Donno & Riccardo Donati & Gino Favero & Paola Modesti, 2019. "Risk estimation for short-term financial data through pooling of stable fits," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 33(4), pages 447-470, December.
    17. Deepak Jadhav & T.V. Ramanathan & U.V. Naik-Nimbalkar, 2009. "Modified Estimators of the Expected Shortfall," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 8(2), pages 87-107, May.

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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