On the Evaluation of Marginal Expected Shortfall

7 Pages Posted: 17 Oct 2010

See all articles by Massimiliano Caporin

Massimiliano Caporin

University of Padua - Department of Statistical Sciences

Paolo Santucci de Magistris

Aarhus University - CREATES

Date Written: October 15, 2010

Abstract

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.

Keywords: Marginal Expected Shortfall, Log-Returns, Systemic Risk

JEL Classification: C18, C58, G10

Suggested Citation

Caporin, Massimiliano and Santucci de Magistris, Paolo, On the Evaluation of Marginal Expected Shortfall (October 15, 2010). Available at SSRN: https://ssrn.com/abstract=1692843 or http://dx.doi.org/10.2139/ssrn.1692843

Massimiliano Caporin (Contact Author)

University of Padua - Department of Statistical Sciences ( email )

Via Battisti, 241
Padova, 35121
Italy

Paolo Santucci de Magistris

Aarhus University - CREATES ( email )

Department of Economics and Business Economics
Fuglesangs Allè 4
Aarhus V, 8210
Denmark

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