Abstract

https://ssrn.com/abstract=2385137
 


 



Coherence Versus Elicitability in Measures of Market Risk


James Ming Chen


Michigan State University - College of Law

January 25, 2014

MSU Legal Studies Research Paper No. 11-28

Abstract:     
The Basel II and III accords prescribe distinct measures of market risk in the trading book of regulated financial institutions. Basel II has embraced value-at-risk (VaR) analysis, while Basel III has suggested that VaR be replaced by a different measure of risk, expected shortfall. These measures of risk suffer from mutually irreconcilable flaws. VaR fails to satisfy the conditions required of coherent measures of risk. Conversely, expected shortfall fails the mathematical requirements for elicitability. Mathematical limitations therefore force a choice between theoretically sound aggregation of risks and reliable backtesting of risk forecasts against historical observations.

This research note is a condensed version of Measuring Market Risk Under Basel II, 2.5, and III: VaR, Stressed VaR, and Expected Shortfall, a full working paper posted at http://ssrn.com/abstract=2252463.

Number of Pages in PDF File: 6

Keywords: Basel, Basel II, Basel III, value-at-risk, VaR, expected shortfall, risk, banking, coherence, elicitability


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Date posted: January 27, 2014 ; Last revised: February 14, 2014

Suggested Citation

Chen, James Ming, Coherence Versus Elicitability in Measures of Market Risk (January 25, 2014). MSU Legal Studies Research Paper No. 11-28. Available at SSRN: https://ssrn.com/abstract=2385137 or http://dx.doi.org/10.2139/ssrn.2385137

Contact Information

James Ming Chen (Contact Author)
Michigan State University - College of Law ( email )
318 Law College Building
East Lansing, MI 48824-1300
United States
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