Expected shortfall under a model with market and credit risks

Kin Bong Siu, Hailiang Yang

Research output: Chapter in Book or Report/Conference proceedingChapterpeer-review

3 Citations (Scopus)

Abstract

Value-at-Risk (VaR), due to its simplicity and ease of interpretability, has become a popular risk measure in finance nowadays. However, recent research find that VaR is not a coherent risk measure and cannot incorporate the loss beyond VaR or tail risk. This chapter considers expected shortfall (ES) as an alternative risk measure. We consider a portfolio subject to both market and credit risks. We model the credit rating using a Markov chain. Thus our model can be treated as a Markovian regime-switching model. We also propose a weak Markov chain model which can take into account the dependency of the risks. Expressions for VaR, ES and numerical results are presented to illustrate the proposed ideas.

Original languageEnglish
Title of host publicationInternational Series in Operations Research and Management Science
PublisherSpringer New York LLC
Pages91-100
Number of pages10
Publication statusPublished - 2007
Externally publishedYes

Publication series

NameInternational Series in Operations Research and Management Science
Volume104
ISSN (Print)0884-8289

Keywords

  • Coherent risk measure
  • Credit ranking
  • Credit risk
  • Expected shortfall
  • Market risk
  • Markov chain
  • Value at Risk
  • Weak Markov chain

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