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 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.

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Metadaten
Author:Stefan MittnikORCiDGND, Tina Yener
URN:urn:nbn:de:hebis:30-56871
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2008,14
Series (Serial Number):CFS working paper series (2008, 14)
Document Type:Working Paper
Language:English
Year of Completion:2008
Year of first Publication:2008
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2008/08/07
Tag:Correlated Events; Latent Variables; Operational Risk
GND Keyword:Korrelation; Abhängigkeit; Risiko; Messung; Value at Risk
HeBIS-PPN:202903419
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:C Mathematical and Quantitative Methods / C5 Econometric Modeling / C52 Model Evaluation and Selection
Licence (German):License LogoDeutsches Urheberrecht