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Expected Shortfall Under a Model With Market and Credit Risks

In: Hidden Markov Models in Finance

Author

Listed:
  • Kin Bong Siu

    (The University of Hong Kong)

  • Hailiang Yang

    (The University of Hong Kong)

Abstract

Summary Value-at-Risk (VaR), due to its simplicity and ease of interpretability, has become a popular risk measure in finance nowadays. However, recent research find that VaR is not a coherent risk measure and cannot incorporate the loss beyond VaR or tail risk. This chapter considers expected shortfall (ES) as an alternative risk measure. We consider a portfolio subject to both market and credit risks. We model the credit rating using a Markov chain. Thus our model can be treated as a Markovian regime-switching model. We also propose a weak Markov chain model which can take into account the dependency of the risks. Expressions for VaR, ES and numerical results are presented to illustrate the proposed ideas.

Suggested Citation

  • Kin Bong Siu & Hailiang Yang, 2007. "Expected Shortfall Under a Model With Market and Credit Risks," International Series in Operations Research & Management Science, in: Rogemar S. Mamon & Robert J. Elliott (ed.), Hidden Markov Models in Finance, chapter 6, pages 91-100, Springer.
  • Handle: RePEc:spr:isochp:978-0-387-71163-8_6
    DOI: 10.1007/0-387-71163-5_6
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    Cited by:

    1. Georges Dionne & Amir Saissi Hassani, 2015. "Endogenous Hidden Markov Regimes in Operational Loss Data: Application to the Recent Financial Crisis," Cahiers de recherche 1516, CIRPEE.

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