On the evaluation of marginal expected shortfall

Massimiliano Caporin and Paolo Santucci de Magistris

Applied Economics Letters, 2012, vol. 19, issue 2, 175-179

Abstract: In the analysis of systemic risk, Marginal Expected Shortfall (MES) may be considered to evaluate the marginal impact of a single stock on the market Expected Shortfall (ES). These quantities are generally computed using log-returns, in particular when there is also a focus on returns conditional distribution. In this case, the market log-return is only approximately equal to the weighed sum of equities log-returns. We show that the approximation error is large during turbulent market phases, with a subsequent impact on MES. We then suggest how to improve the evaluation of MES by means of a second-order approximation.

Date: 2012
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DOI: 10.1080/13504851.2011.570704

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