Worst-Case Higher Moment Risk Measure: Addressing Distributional Shifts and Procyclicality

Carlos Castro-Iragorri (), Fabio Gómez () and Nancy Quiceno
Additional contact information
Carlos Castro-Iragorri: Facultad de Economía Universidad del Rosario
Fabio Gómez: Facultad de Economía Universidad del Rosario
Nancy Quiceno: Camara de Riesgo Central de Contraparte, CRCC

No 21048, Documentos de Trabajo from Universidad del Rosario

Abstract: This paper addresses the inherent procyclicality in widely adopted financial risk measures, such as Expected Shortfall (ES). We propose an innovative approach utilizing the Higher Moment (HM) risk measure, which offers a robust solution to distributional shifts by incorporating adaptive features. Empirical results using historical S&P500 returns indicate that worst-case HM risk measures significantly reduce the underestimation of risk and provide more stable risk assessments throughout the financial cycle compared to traditional ES predictions. These results suggest that HM risk measures represent a viable alternative to regulatory add-ons for stress testing and procyclicality mitigation in financial risk management.

Keywords: procyclicality; higher moment risk; stress testing; expected shortfall (search for similar items in EconPapers)
JEL-codes: C58 G17 G32 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2024-02-28
New Economics Papers: this item is included in nep-ifn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://repository.urosario.edu.co/server/api/core ... 6389f1ec4d7e/content Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:col:000092:021048

Access Statistics for this paper

More papers in Documentos de Trabajo from Universidad del Rosario Contact information at EDIRC.
Bibliographic data for series maintained by Facultad de Economía ().