Capturing Tail Risks Beyond VaR

Wong, Woon K. ORCID: https://orcid.org/0000-0001-6892-9965, Fan, G. and Zheng, Y. 2012. Capturing Tail Risks Beyond VaR. Review of Pacific Basin Financial Markets and Policies 15 (3) , 1250015. 10.1142/S0219091512500154

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Abstract

Since Value-at-Risk (VaR) disregards tail losses beyond the VaR boundary, the expected shortfall (ES), which measures the average loss when a VaR is exceeded, and the tail-risk-of-VaR (TR), which sums the sizes of tail losses, are used to investigate risks at the tails of distributions for major stock markets. As VaR exceptions are rare, we employ the saddlepoint or small sample asymptotic technique to backtest ES and TR. Because the two risk measures are complementary to each other and hence provide more powerful backtests, we are able to show that (a) the correct specification of distribution tail, rather than heteroscedastic process, plays a key role to accurate risk forecasts; and (b) it is best to model the tails separately from the central part of distribution using the Generalized Pareto Distribution (GPD). To sum up, we provide empirical evidence that financial markets behave differently during crises, and extreme risks cannot be modeled effectively under normal market conditions or based on a short data history.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management H Social Sciences > HG Finance
Uncontrolled Keywords:	Value-at-Risk; expected shortfall; tail risk; backtesting; saddlepoint technique
Publisher:	World Scientific
ISSN:	0219-0915
Last Modified:	24 Oct 2022 11:44
URI:	https://orca.cardiff.ac.uk/id/eprint/49182

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