Comparative Analyses of Expected Shortfall and Value-at-Risk (3): Their Validity under Market Stress

Yasuhiro Yamai and Toshinao Yoshiba
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Yasuhiro Yamai: Institute for Monetary & Econ Studies, Bank of Japan
Toshinao Yoshiba: Institute for Monetary & Econ Studies, Bank of Japan

Monetary and Economic Studies, 2002, vol. 20, issue 3, 181-237

Abstract: In this paper, we compare value-at-risk (VaR) and expected shortfall under market stress. Assuming that the multivariate extreme value distribution represents asset returns under market stress, we simulate asset returns with this distribution. With these simulated asset returns, we examine whether market stress affects the properties of VaR and expected shortfall. Our findings are as follows. First, VaR and expected shortfall may underestimate the risk of securities with fat- tailed properties and a high potential for large losses. Second, VaR and expected shortfall may both disregard the tail dependence of asset returns. Third, expected shortfall has less of a problem in disregarding the fat tails and the tail dependence than VaR does.

JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (33)

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