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Scenario-based risk evaluation

Author

Listed:
  • Ruodu Wang

    (University of Waterloo)

  • Johanna F. Ziegel

    (University of Bern)

Abstract

Risk measures such as expected shortfall (ES) and value-at-risk (VaR) have been prominent in banking regulation and financial risk management. Motivated by practical considerations in the assessment and management of risks, including tractability, scenario relevance and robustness, we consider theoretical properties of scenario-based risk evaluation. We establish axiomatic characterisations of scenario-based risk measures that are comonotonic-additive or coherent, and we obtain a novel ES-based representation result. We propose several novel scenario-based risk measures, including various versions of Max-ES and Max-VaR, and study their properties. The theory is illustrated with financial data examples.

Suggested Citation

  • Ruodu Wang & Johanna F. Ziegel, 2021. "Scenario-based risk evaluation," Finance and Stochastics, Springer, vol. 25(4), pages 725-756, October.
    • Handle: RePEc:spr:finsto:v:25:y:2021:i:4:d:10.1007_s00780-021-00460-9
    DOI: 10.1007/s00780-021-00460-9
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Yi Shen & Zachary Van Oosten & Ruodu Wang, 2024. "Partial Law Invariance and Risk Measures," Papers 2401.17265, arXiv.org, revised Jun 2024.
    2. Felix-Benedikt Liebrich, 2021. "Risk sharing under heterogeneous beliefs without convexity," Papers 2108.05791, arXiv.org, revised May 2022.
    3. Shuo Gong & Yijun Hu & Linxiao Wei, 2022. "Distortion risk measures in random environments: construction and axiomatic characterization," Papers 2211.00520, arXiv.org, revised Mar 2023.
    4. Hirbod Assa & Peng Liu, 2024. "Factor risk measures," Papers 2404.08475, arXiv.org.
    5. Ruodu Wang & Zhenyuan Zhang, 2022. "Simultaneous Optimal Transport," Papers 2201.03483, arXiv.org, revised May 2023.
    6. Tolulope Fadina & Yang Liu & Ruodu Wang, 2021. "A Framework for Measures of Risk under Uncertainty," Papers 2110.10792, arXiv.org, revised Sep 2023.
    7. Shuo Gong & Yijun Hu & Linxiao Wei, 2022. "Risk measurement of joint risk of portfolios: a liquidity shortfall aspect," Papers 2212.04848, arXiv.org, revised May 2024.
    8. Fabio Bellini & Tiantian Mao & Ruodu Wang & Qinyu Wu, 2024. "Disappointment concordance and duet expectiles," Papers 2404.17751, arXiv.org, revised Oct 2024.
    9. Dejian Tian & Xunlian Wang, 2023. "Dynamic star-shaped risk measures and $g$-expectations," Papers 2305.02481, arXiv.org.
    10. Nendel, Max & Streicher, Jan, 2023. "An axiomatic approach to default risk and model uncertainty in rating systems," Journal of Mathematical Economics, Elsevier, vol. 109(C).

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    More about this item

    Keywords

    Scenarios; Risk measures; Basel Accords; Stress adjustment; Dependence adjustment;
    All these keywords.

    JEL classification:

    • C69 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Other
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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