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External Risk Measures and Basel Accords
"... Choosing a proper external risk measure is of great regulatory importance, as exemplified in the Basel II and Basel III Accord which use ValueatRisk (VaR) with scenario analysis as the risk measures for setting capital requirements. We argue a good external risk measure should be robust with respe ..."
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Cited by 5 (2 self)
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Choosing a proper external risk measure is of great regulatory importance, as exemplified in the Basel II and Basel III Accord which use ValueatRisk (VaR) with scenario analysis as the risk measures for setting capital requirements. We argue a good external risk measure should be robust with respect to model misspecification and small changes in the data. A new class of databased risk measures called natural risk statistics are proposed to incorporate robustness. Natural risk statistics are characterized by a new set of axioms; they include the Basel II and III risk measures and a subclass of robust risk measures as special cases; therefore, they provide a theoretical framework for understanding and, if necessary, extending the Basel accords.
On the measurement of economic tail risk
, 2014
"... This paper attempts to provide a decisiontheoretic foundation for the measurement of economic tail risk, which is not only closely related to utility theory but also relevant to statistical model uncertainty. The main result is that the only tail risk measure that satisfies a set of economic axiom ..."
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Cited by 3 (0 self)
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This paper attempts to provide a decisiontheoretic foundation for the measurement of economic tail risk, which is not only closely related to utility theory but also relevant to statistical model uncertainty. The main result is that the only tail risk measure that satisfies a set of economic axioms for the Choquet expected utility and the statistical property of elicitability (i.e. there exists an objective function such that minimizing the expected objective function yields the risk measure) is median shortfall, which is the median of tail loss distribution. Elicitability is important for backtesting. We also extend the result to address model uncertainty by incorporating multiple scenarios. As an application, we argue that median shortfall is a better alternative than expected