On the Evaluation of Marginal Expected Shortfall
University of Padova - Department of Economics and Management "Marco Fanno"
Paolo Santucci de Magistris
University of Aarhus - CREATES
October 15, 2010
In the analysis of systemic risk, Marginal Expected Shortfall may be considered to evaluate the marginal impact of a single stock on the market Expected Shortfall. These quantities are generally computed using log-returns, in particular when there is also a focus on returns conditional distribution. In this case, the market log-return is only approximately equal to the weighed sum of equities log-returns. We show that the approximation error is large during turbulent market phases, with a subsequent impact on Marginal Expected Shortfall. We then suggest how to improve the evaluation of Marginal Expected Shortfall by means of a second order approximation.
Number of Pages in PDF File: 7
Keywords: Marginal Expected Shortfall, Log-Returns, Systemic Risk
JEL Classification: C18, C58, G10working papers series
Date posted: October 17, 2010
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