THE UNEXPECTED SHORTFALL: AN ALTERNATIVE RISK MEASURE

Authors : Ekrem KILIÇ

Pages : 110-130

View : 53 | Download : 23

Publication Date : 2023-10-18

Article Type : Research Paper

Abstract :The international prudential regulation standard – the Basel standards – introduces a substantial change to its market risk framework. The change is part of a comprehensive revision of the standard to address the weaknesses discovered during the global financial crisis insert ignore into journalissuearticles values(GFC); of 2008. One of the key changes is the replacement of Value-at-Risk insert ignore into journalissuearticles values(VaR); with Expected Shortfall insert ignore into journalissuearticles values(ES); as the primary risk measure in the framework. By incorporating the tail events, ES partially answers the concerns raised about the VaR during the GFC. However, ES as well lacks a mechanism to extrapolate the historical shocks. This paper proposes an alternative measure – unexpected shortfall insert ignore into journalissuearticles values(US); – which aims to serve as a better safety barrier for financial institutions. Based on the evidence from 3 conventional currency pairs insert ignore into journalissuearticles values(EUR/USD, USD/TRY, EUR/TRY); and 1 cryptocurrency pair insert ignore into journalissuearticles values(BTC/USD);, the new measure displayed violations in a reasonably close range of the expected values and backtest analyses suggested that the incurred excessive losses for US are less than both VaR and ES.
Keywords : Market Risk, Capital Adequacy, Value at Risk, Expected Shortfall, Basel IV, FRTB

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