Choosing Expected Shortfall over VaR in Basel Ⅲ Using Stochastic Dominance
Bank risk managers follow the Basel Committee on Banking Supervision (BCBS) recommendations that recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES).The Basel Committee on Banking Supervision (2013,p.3) noted that: a number of weaknesses have been identified with using VaR for determining regulatory capital requirements,including its inability to capture tail risk.The proposed reform costs and impact on bank balances may be substantial,such that the size and distribution of daily capital charges under the new rules could be affected significantly.Regulators and bank risk managers agree that all else being equal,a better distribution of daily capital charges is to be preferred.The distribution of daily capital charges depends generally on two sets of factors: (1) the risk function that is adopted (ES versus VaR); and (2) their estimated counterparts.The latter is dependent on what models are used by bank risk managers to provide for forecasts of daily capital charges.That is to say,while ES is known to be a preferable risk function based on its fundamental properties and greater accounting for the tails of alternative distributions,that same sensitivity to tails can lead to greater daily capital charges,which is the relevant (that is,controlling) practical reference for risk management decisions and observations.In view of the generally agreed focus in this field on the tails of non-standard distributions and low probability outcomes,an assessment of relative merits of estimated ES and estimated VaR is ideally not limited to mean variance considerations.For this reason,robust comparisons between ES and VaR will be achieved in the paper by using a Stochastic Dominance (SD) approach to rank ES and VaR.
Stochastic dominance Value-at-Risk Expected Shortfall Optimizing strategy Basel Ⅲ Accord
Chia-Lin Chang Juan-Angel Jimenez-Martin Esfandiar Maasoumi Michael McAleer Teodosio Perez-Amaral
Department of Applied Economics and Department of Finance National Chung Hsing University,Taiwan Department of Quantitative Economics and Complutense Institute of Economic Analysis Complutense(ICAE Department of Economics Emory University,USA Department of Quantitative Finance National Tsing Hua University,Taiwan;Department of Mathematics an
国际会议
ICEFS2017(International Conference on Economics, Finance and Statistics 2017) (2017经济、金融与统计国际会议)
香港
英文
133-156
2017-01-14（万方平台首次上网日期，不代表论文的发表时间）