Do Nonparametric Measures of Extreme Equity Risk Change the Parametric Ordinal Ranking? Evidence from Asia

Abstract

There has been much discussion in the literature about how central measures of equity risk such as standard deviation fail to account for extreme tail risk of equities. Similarly, parametric measures of value at risk (VaR) may also fail to account for extreme risk as they assume a normal distribution which is often not the case in practice. Nonparametric measures of extreme risk such as nonparametric VaR and conditional value at risk (CVaR) have often been found to overcome this problem by measuring actual tail risk without applying any predetermined assumptions. However, this article argues that it is not just the actual risk of equites that is important to investor choices, but also the relative (ordinal) risk of equities compared to each other. Using an applied setting of industry portfolios in a variety of Asian countries (benchmarked to the United States), over crisis and non-crisis periods, this article finds that nonparametric measures of VaR and CVaR may provide only limited new information to investors about relative risk in the portfolios examined as there is a high degree of similarity found in relative industry risk when using nonparametric metrics as compared to central or parametric measures such as standard deviation and parametric VaR.

A Comprehensive Stability Indicator for Banks

“…We then used these Creditworthiness distressed and Conditions distressed values to calculate KM distressed (=Leverage 2014 × Conditions 2014 /Conditions distressed ), CSI distressed , (=KM distressed /Creditworthiness distressed ) and Zone distressed for each bank. As shown in Table 3, applying these factors to our model achieved a 99% level of confidence similarity to the Federal Reserve tests in the rankings of banks (best to worst), using a Spearman ranking correlation test which compares the relative ordinal risk of observations across datasets (Powell et al 2018). A key difference is that, whereas the Federal Reserve results issued every bank with a pass based on a pass/fail grading, our traffic light system, with its additional 'caution' (orange) category, classified 25% of banks (five banks) as orange.…”