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Post by Sapphire Capital on Jul 11, 2008 7:01:34 GMT 4
Value-at-Risk and Expected Shortfall for Rare Events STEFAN MITTNIK University of Kiel - Institute of Statistics & Econometrics; Ludwig Maximilians University of Munich - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) TINA YENER Ludwig Maximilians University of Munich -------------------------------------------------------------------------------- April 2008 CFS Working Paper 2008/14 Abstract: Abstract. We show that the use of correlations for modeling dependencies may lead to counterintuitive behavior of risk measures, such as Value-at-Risk (VaR) and Expected Short- fall (ES), when the risk of very rare events is assessed via Monte-Carlo techniques. The phenomenon is demonstrated for mixture models adapted from credit risk analysis as well as for common Poisson-shock models used in reliability theory. An obvious implication of this finding pertains to the analysis of operational risk. The alleged incentive suggested by the New Basel Capital Accord (Basel II), namely decreasing minimum capital requirements by allowing for less than perfect correlation, may not necessarily be attainable. papers.ssrn.com/sol3/papers.cfm?abstract_id=1124942
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