On Exactitude in Financial Regulation: Value-at-Risk, Expected Shortfall, and Expectiles

Risks 2018, 6(2), 61

28 Pages Posted: 8 Mar 2018 Last revised: 12 Jun 2018

See all articles by James Ming Chen

James Ming Chen

Michigan State University - College of Law

Date Written: March 8, 2018


This article reviews two leading measures of financial risk and an emerging alternative. Embraced by the Basel accords, value-at-risk and expected shortfall are the leading measures of financial risk. Expectiles offset the weaknesses of value-at-risk (VaR) and expected shortfall. Indeed, expectiles are the only elicitable law-invariant coherent risk measures. After reviewing practical concerns involving backtesting and robustness, this article more closely examines regulatory applications of expectiles. Expectiles are most readily evaluated as a special class of quantiles. For ease of regulatory implementation, expectiles can be defined exclusively in terms of VaR, expected shortfall, and the thresholds at which those competing risk measures are enforced. Moreover, expectiles are in harmony with gain/loss ratios in financial risk management. Expectiles may address some of the flaws in VaR and expected shortfall — subject to the reservation that no risk measure can achieve exactitude in regulation.

Keywords: Expectiles, risk measures, expected shortfall, VaR, Basel accords, elicitability, coherence, backtesting, robustness, gain/loss ratios, stochastic dominance

Suggested Citation

Chen, James Ming, On Exactitude in Financial Regulation: Value-at-Risk, Expected Shortfall, and Expectiles (March 8, 2018). Risks 2018, 6(2), 61. Available at SSRN: https://ssrn.com/abstract=3136278 or http://dx.doi.org/10.2139/ssrn.3136278

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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