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Comparative Analyses of Expected Shortfall and Value-at-Risk (3): Their Validity under Market Stress

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  • Yamai, Yasuhiro

    (Institute for Monetary & Econ Studies, Bank of Japan)

  • Yoshiba, Toshinao

    (Institute for Monetary & Econ Studies, Bank of Japan)

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    Abstract

    In this paper, we compare value-at-risk (VaR) and expected shortfall under market stress. Assuming that the multivariate extreme value distribution represents asset returns under market stress, we simulate asset returns with this distribution. With these simulated asset returns, we examine whether market stress affects the properties of VaR and expected shortfall. Our findings are as follows. First, VaR and expected shortfall may underestimate the risk of securities with fat- tailed properties and a high potential for large losses. Second, VaR and expected shortfall may both disregard the tail dependence of asset returns. Third, expected shortfall has less of a problem in disregarding the fat tails and the tail dependence than VaR does.

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    Bibliographic Info

    Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

    Volume (Year): 20 (2002)
    Issue (Month): 3 (October)
    Pages: 181-237

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    Handle: RePEc:ime:imemes:v:20:y:2002:i:3:p:181-237

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    Cited by:
    1. Wayne Tarrant, 2011. "Historical risk measures on stock market indices and energy markets," Papers 1111.4421, arXiv.org.
    2. Dominique Guegan & Wayne Tarrant, 2010. "On the necessity of five risk measures," Documents de travail du Centre d'Economie de la Sorbonne 10005, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    3. repec:hal:wpaper:halshs-00721339 is not listed on IDEAS
    4. 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.
    5. Battaglia, Francesca & Gallo, Angela, 2013. "Securitization and systemic risk: An empirical investigation on Italian banks over the financial crisis," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 274-286.
    6. Dominique Guegan & Wayne Tarrant, 2012. "Viewing Risk Measures as information," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00721350, HAL.
    7. Giannopoulos, Kostas & Tunaru, Radu, 2005. "Coherent risk measures under filtered historical simulation," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 979-996, April.
    8. Dominique Gu/'egan & Wayne Tarrant, 2011. "Viewing Risk Measures as Information," Papers 1111.4417, arXiv.org.
    9. Jean-David Fermanian & Olivier Scaillet, 2003. "Sensitivity Analysis of Var and Expected Shortfall for Portfolios under Netting Agreements," Working Papers 2003-33, Centre de Recherche en Economie et Statistique.
    10. Dalla Valle, L. & Giudici, P., 2008. "A Bayesian approach to estimate the marginal loss distributions in operational risk management," Computational Statistics & Data Analysis, Elsevier, vol. 52(6), pages 3107-3127, February.
    11. Dominique Gu\'egan & Wayne Tarrant, 2011. "On the Necessity of Five Risk Measures," Papers 1111.4414, arXiv.org.
    12. repec:hal:wpaper:halshs-00721350 is not listed on IDEAS

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