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.
Author: | Stefan MittnikORCiDGND, Tina Yener |
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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): | Deutsches Urheberrecht |