Intra-Horizon Expected Shortfall and Risk Structure in Models with Jumps

Walter Farkas, Ludovic Mathys and Nikola Vasiljevic
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Walter Farkas: University of Zurich - Department of Banking and Finance; Swiss Finance Institute; ETH Zurich
Ludovic Mathys: University of Zurich - Department of Banking and Finance
Nikola Vasiljevic: University of Zurich, Department of Banking and Finance

No 19-76, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The present article deals with intra-horizon risk in models with jumps. Our general understanding of intra-horizon risk is along the lines of the approach taken in [BRSW04], [Ro08], [BMK09], [BP10], and [LV19]. In particular, we believe that quantifying market risk by strictly relying on point-in-time measures cannot be deemed a satisfactory approach in general. Instead, we argue that complementing this approach by studying measures of risk that capture the magnitude of losses potentially incurred at any time of a trading horizon is necessary when dealing with (m)any financial position(s). To address this issue, we propose an intra-horizon analogue of the expected shortfall for general profit and loss processes and discuss its key properties. Our intra-horizon expected shortfall is well-defined for (m)any popular class(es) of Levy processes encountered when modeling market dynamics and constitutes a coherent measure of risk, as introduced in [CDK04]. On the computational side, we provide a simple method to derive the intra-horizon risk inherent to popular Levy dynamics. Our general technique relies on results for maturity-randomized first-passage probabilities and allows for a derivation of diffusion and single jump risk contributions. These theoretical results are complemented with an empirical analysis, where popular Levy dynamics are calibrated to S&P 500 index data and an analysis of the resulting intra-horizon risk is presented.

Keywords: Intra-Horizon Risk; Value at Risk; Expected Shortfall; Levy Processes; Hyper-Exponential Distribution; Risk Decomposition (search for similar items in EconPapers)
JEL-codes: C32 C63 G01 G51 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2019-12
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (2)

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