Value-at-Risk and expected shortfall for rare events

Arbeitspapier

We show that the use of correlations for modeling dependencies may lead to counterintuitive behavior of risk measures, such as Value-at-Risk (VaR) and Expected Short- fall (ES), when the risk of very rare events is assessed via Monte-Carlo techniques. The phenomenon is demonstrated for mixture models adapted from credit risk analysis as well as for common Poisson-shock models used in reliability theory. An obvious implication of this finding pertains to the analysis of operational risk. The alleged incentive suggested by the New Basel Capital Accord (Basel II), amely decreasing minimum capital requirements by allowing for less than perfect correlation, may not necessarily be attainable.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CFS Working Paper ; No. 2008/14

Classification and Topics

• Classification: Wirtschaft ; Model Evaluation, Validation, and Selection ; Portfolio Choice; Investment Decisions ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Subject: Operational Risk ; Latent Variables ; Correlated Events ; Value at Risk ; Bankrisiko ; Korrelation ; Multivariate Analyse ; Basel II ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Mittnik, Stefan ; Yener, Tina
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, Center for Financial Studies (CFS)
• (where): Frankfurt a. M.
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/25549
• URN: urn:nbn:de:hebis:30-56871
• Last update: 10.03.2025, 11:43 AM CET