VaR and expected shortfall: a non-normal regime switching framework
Date
2009-09
Authors
Elliott, Robert J., author
Miao, Hong, author
Quantitative Finance, publisher
Journal Title
Journal ISSN
Volume Title
Abstract
We have developed a regime switching framework to compute the Value at Risk and Expected Shortfall measures. Although Value at Risk as a risk measure has been criticized by some researchers for lack of subadditivity, it is still a central tool in banking regulations and internal risk management in the finance industry. In contrast, Expected Shortfall (ES) is coherent and convex, so it is a better measure of risk than Value at Risk. Expected Shortfall is widely used in the insurance industry and has the potential to replace Value at Risk as a standard risk measure in the near future. We have proposed regime switching models to measure value at risk and expected shortfall for a single financial asset as well as financial portfolios. Our models capture the volatility clustering phenomenon and variance-independent variation in the higher moments by assuming the returns follow Student-t distributions.
Description
Includes bibliographical references (pages 20-22).
Published as: Quantitative Finance, vol.9, no. 6, pp.747-755, September 2009, https://doi.org/10.1080/14697680902849320.
Published as: Quantitative Finance, vol.9, no. 6, pp.747-755, September 2009, https://doi.org/10.1080/14697680902849320.
Rights Access
Subject
value at risk (VaR)
expected shortfall (ES)
regime switching
student-t distribution
fat tailed
volatility clustering