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Choosing expected shortfall over VaR in Basel III using stochastic dominance

Chia-Lin Chang (), Juan Jimenez-Martin (), Esfandiar Maasoumi, Michael McAleer and Pérez-Amaral, Teodosio

International Review of Economics & Finance, 2019, vol. 60, issue C, 95-113

Abstract: In this paper we use stochastic dominance to evaluate the consequences of moving from Value-at-Risk (VaR) to Expected Shortfall (ES) from a policy maker's perspective. In particular, we compare VaR at the 99% level (VaR99) and ES at the 97.5% level (ES97.5). We contemplate VaR99 and ES97.5 as two alternative risk metrics according to the capital adequacy bank regulation, as suggested by Basel III. Moving from VaR99 to ES97.5 will have effects in terms of the quantity and quality of the capital required to banks. According to the Basel Committee on Banking Supervision (2013, page 18):

Keywords: Stochastic dominance; Value-at-Risk; Expected shortfall; Basel III accord; Daily capital charges (search for similar items in EconPapers)
JEL-codes: G32 G11 G17 C53 C22 (search for similar items in EconPapers)
Date: 2019
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Related works:
Working Paper: Choosing Expected Shortfall over VaR in Basel III Using Stochastic Dominance (2015) Downloads
Working Paper: Choosing Expected Shortfall over VaR in Basel III Using Stochastic Dominance (2015) Downloads
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