Value-at-Risk and expected shortfall for rare events

We show that the use of correlations for modeling dependencies may lead to counterintuitive behavior of risk measures, such as Value-at-Risk (VaR) and Expected Short- fall (ES), when the risk of very rare events is asses
We show that the use of correlations for modeling dependencies may lead to counterintuitive behavior of risk measures, such as Value-at-Risk (VaR) and Expected Short- fall (ES), when the risk of very rare events is assessed via Monte-Carlo techniques. The phenomenon is demonstrated for mixture models adapted from credit risk analysis as well as for common Poisson-shock models used in reliability theory. An obvious implication of this finding pertains to the analysis of operational risk. The alleged incentive suggested by the New Basel Capital Accord (Basel II), amely decreasing minimum capital requirements by allowing for less than perfect correlation, may not necessarily be attainable. JEL Classification : C52, G11, G32
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Metadaten
Author:Stefan Mittnik, Tina Yener
URN:urn:nbn:de:hebis:30-56871
Series (Serial Number):CFS working paper series (2008, 14)
Document Type:Working Paper
Language:English
Date of Publication (online):2008/08/07
Year of first Publication:2008
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2008/08/07
Tag:Correlated Events; Latent Variables ; Operational Risk
HeBIS PPN:202903419
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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