How useful is the Marginal Expected Shortfall for the measurement of systemic exposure? A practical assessment

Idier, Julien; Lamé, Gildas; Mésonnier, Jean‐Stéphane

doi:10.1016/j.jbankfin.2014.06.022

Cited by 77 publications

(20 citation statements)

References 20 publications

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“…riskometers (see, e.g., Benoit et al 2013, Danielsson et al 2016, Idier, Lame, and Mesonnier 2011, Zhang et al 2015. Again, as we assume away any error due to design imperfections, any inherent design imperfections in the riskometers themselves and/or any simplifying assumptions that we make when implementing them that reduce their economic validity will in no way adversely affect our measure of riskometer reliability.…”

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confidence: 99%

Can We Prove a Bank Guilty of Creating Systemic Risk? A Minority Report

Danı́elsson¹,

James

Valenzuela³

et al. 2014

SSRN Journal

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Since increasing a bank's capital requirement to improve the stability of the financial system imposes costs upon the bank, a regulator should ideally be able to prove beyond a reasonable doubt that banks classified as systemically risky really do create systemic risk before subjecting them to this capital punishment. Evaluating the performance of two leading systemic risk models, we show that estimation error alone prevents the reliable identification of the most systemically risky banks. We conclude that it will be a considerable challenge to develop a riskometer that is both sound and reliable enough to provide an adequate foundation for macroprudential policy.Keywords: Systemic risk, macroprudential policy, financial stability, risk management. This paper is published as part of the Systemic Risk Centre's Discussion Paper Series. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published.Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the above address. AbstractSince increasing a bank's capital requirement to improve the stability of the financial system imposes costs upon the bank, a regulator should ideally be able to prove beyond a reasonable doubt that banks classified as systemically risky really do create systemic risk before subjecting them to this capital punishment. Evaluating the performance of two leading systemic risk models, we show that estimation error alone prevents the reliable identification of the most systemically risky banks. We conclude that it will be a considerable challenge to develop a riskometer that is both sound and reliable enough to provide an adequate foundation for macroprudential policy.

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confidence: 99%

Can We Prove a Bank Guilty of Creating Systemic Risk? A Minority Report

Danı́elsson¹,

James

Valenzuela³

et al. 2014

SSRN Journal

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“…Acharya et al (2017) bridged the gap between the structural and reducedform approaches by introducing the systemic expected shortfall into a simple economic model, which revisited the widely popular measure Marginal Expected Shortfall (MES). A comprehensive discussion was presented by Idierb et al (2014), where the practical advantages of MES in detecting extreme risk exposure of a financial institution to SR were empirically explained. Nonparametric inferences for MES were provided in Cai et al (2015) by a statistic extreme value approach.…”

Section: Introductionmentioning

confidence: 99%

Asymptotics for Systemic Risk With Dependent Heavy-Tailed Losses

Liu¹,

Yang²

2021

ASTIN Bull.

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Systemic risk (SR) is considered as the risk of collapse of an entire system, which has played a significant role in explaining the recent financial turmoils from the insurance and financial industries. We consider the asymptotic behavior of the SR for portfolio losses in the model allowing for heavy-tailed primary losses, which are equipped with a wide type of dependence structure. This risk model provides an ideal framework for addressing both heavy-tailedness and dependence. As some extensions, several simulation experiments are conducted, where an insurance application of the asymptotic characterization to the determination and approximation of related SR capital has been proposed, based on the SR measure.

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“…One popular example is the widely popular indicator Marginal Expected Shortfall (MES), which in the financial literature is a popular statistical measure of systemic resilience in financial markets. The literature is quite rich and a comprehensive description is given by Idierb et al (2014), where the practical advantages of this risk measure in detecting extreme risk exposures of financial firms are empirically explained. In mathematical terms, MES is a conditional expectation, E X|Y > t , for large values of t. Clearly, extreme cases are viewed here by considering X and Y to be some future liabilities (consisting with our prior definitions of X and Y ), rather than measuring the wealth, but changing to the left hand side of the real line is a simple exercise.…”

Section: Introductionmentioning

confidence: 99%

Extremes for coherent risk measures

Asimit

2016

Insurance: Mathematics and Economics

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This is the accepted version of the paper.This version of the publication may differ from the final published version. Permanent repository link: http://openaccess.city.ac.uk/16268/ Link to published version: http://dx.Abstract. Various concepts appeared in the existing literature to evaluate the risk exposure of a financial or insurance firm/subsidiary/line of business due to the occurrence of some extreme scenarios. Many of those concepts, such as Marginal Expected Shortfall or Tail Conditional Expectation, are simply some conditional expectations that evaluate the risk in adverse scenarios and are useful for signaling to a decision-maker the poor performance of its risk portfolio or to identify which sub-portfolio is likely to exhibit a massive downside risk. We investigate the latter risk under the assumption that it is measured via a coherent risk measure, which obviously generalizes the idea of only taking the expectation of the downside risk. Multiple examples are given and our numerical illustrations show how the asymptotic approximations can be used in the capital allocation exercise. We have concluded that the expectation of the downside risk does not fairly take into account the individual risk contribution when allocating the VaR-based regulatory capital, and thus, more conservative risk measurements are recommended. Finally, we have found that more conservative risk measurements do not improve the fairness of the cost of capital allocation when the uncertainty with parameter estimation is present, even at a very high level.

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How useful is the Marginal Expected Shortfall for the measurement of systemic exposure? A practical assessment

Cited by 77 publications

References 20 publications

Can We Prove a Bank Guilty of Creating Systemic Risk? A Minority Report

Can We Prove a Bank Guilty of Creating Systemic Risk? A Minority Report

Asymptotics for Systemic Risk With Dependent Heavy-Tailed Losses

Extremes for coherent risk measures

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