Expected Shortfall as a Response to Model Risk

James Ming Chen
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James Ming Chen: Michigan State University

Chapter Chapter 16 in Postmodern Portfolio Theory, 2016, pp 291-305 from Palgrave Macmillan

Abstract: Abstract Reducing the vulnerability of parametric VaR to model risk by improving its robustness addresses merely one threat to the reliability of VaR analysis. The most serious menace to VaR—and to the technique’s viability as the Basel Accords’ preferred approach to financial risk management—lies in VaR’s failure to satisfy the theoretical rigors demanded of “coherent” measures of risk.1 The expected shortfall for any confidence interval, which is derived directly from VaR for that interval, is subadditive and coherent. VaR itself is not.2 The allure of subadditivity and coherence supports Basel III’s embrace of expected shortfall as the international banking system’s preferred measure of market risk.

Keywords: Risk Measure; Supra Note; Mutual Fund; Loss Distribution; Coherent Risk Measure (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:pal:qpochp:978-1-137-54464-3_16

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DOI: 10.1057/978-1-137-54464-3_16

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