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Systematic risk under extremely adverse market condition

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  • Maarten van Oordt
  • Chen Zhou

Abstract

Extreme losses are the major concern in risk management. The dependence between financial assets and the market portfolio changes under extremely adverse market conditions. We develop a measure of systematic tail risk, the tail regression beta , defined by an asset’s sensitivity to large negative market shocks, and establish the estimation methodology. We compare it to regular systematic risk measures: the market beta and the downside beta. Furthermore, the tail regression beta is a useful instrument in both portfolio risk management and systemic risk management. We demonstrate its applications in analyzing Value-at-Risk (VaR) and Conditional Value-at-Risk (CoVaR).

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 281.

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Date of creation: Mar 2011
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Handle: RePEc:dnb:dnbwpp:281

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Related research

Keywords: Tail regression beta; downside risk; Extreme Value Theory; tail dependence; risk management;

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  1. Galagedera, Don U.A., 2007. "An alternative perspective on the relationship between downside beta and CAPM beta," Emerging Markets Review, Elsevier, vol. 8(1), pages 4-19, March.
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Cited by:
  1. López-Espinosa, Germán & Moreno, Antonio & Rubia, Antonio & Valderrama, Laura, 2012. "Short-term wholesale funding and systemic risk: A global CoVaR approach," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3150-3162.

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