Accurate Evaluation of Expected Shortfall for Linear Portfolios with Elliptically Distributed Risk Factors

Dobrislav Dobrev, Travis Nesmith and Dong Hwan Oh
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Dobrislav Dobrev: https://www.federalreserve.gov/econres/dobrislav-dobrev.htm
Dong Hwan Oh: https://www.federalreserve.gov/econres/dong-hwan-oh.htm

No 2016-065, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We provide an accurate closed-form expression for the expected shortfall of linear portfolios with elliptically distributed risk factors. Our results aim to correct inaccuracies that originate in Kamdem (2005) and are present also in at least thirty other papers referencing it, including the recent survey by Nadarajah, Zhang, and Chan (2014) on estimation methods for expected shortfall. In particular, we show that the correction we provide in the popular multivariate Student t setting eliminates understatement of expected shortfall by a factor varying from at least 4 to more than 100 across different tail quantiles and degrees of freedom. As such, the resulting economic impact in financial risk management applications could be significant. We further correct such errors encountered also in closely related results in Kamdem (2007, 2009) for mixtures of elliptical distributions. More generally, our findings point to the extra scrutiny required when deploying new methods for expected shortfall estimation in practice.

Keywords: Expected shortfall; Elliptical distributions; Multivariate Student t distribution; Accurate closed-form expression (search for similar items in EconPapers)
JEL-codes: C46 G11 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2016
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Accurate Evaluation of Expected Shortfall for Linear Portfolios with Elliptically Distributed Risk Factors (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-65

DOI: 10.17016/FEDS.2016.065r1

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