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From BASEL III to BASEL IV and beyond: Expected shortfall and expectile risk measures

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  • Zaevski, Tsvetelin S.
  • Nedeltchev, Dragomir C.

Abstract

The article contributes to the ongoing search for a market risk measure that is both coherent and elicitable. We compare two traditional measures, namely Value-at-Risk and the expected shortfall, with another relatively novel one established on the expectile probability term. Our research is based on five models: Black–Scholes, exponential tempered stable, Heston, Bates and another stochastic volatility model with a tempered stable jump correction. We apply the general Fourier inversion formula to derive closed form formulas for calculating not only the expectile based risk measure but also the Value-at-Risk and the expected shortfall. These models are calibrated by combining nonlinear programming with simulated annealing at a moving window. Additionally, we compare the generated values of the risk measures with the real ones. Last but not least, we modify the expectile based risk measure as well as the expected shortfall by introducing correction coefficients.

Suggested Citation

  • Zaevski, Tsvetelin S. & Nedeltchev, Dragomir C., 2023. "From BASEL III to BASEL IV and beyond: Expected shortfall and expectile risk measures," International Review of Financial Analysis, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:finana:v:87:y:2023:i:c:s1057521923001618
    DOI: 10.1016/j.irfa.2023.102645
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    More about this item

    Keywords

    Basel Committee on Banking Supervision; Value-at-Risk; Expected shortfall; Expectile based risk measure; Correction coefficients;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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