In the analysis of systemic risk, Marginal Expected Shortfall (MES) may be considered to evaluate the marginal impact of a single stock on the market Expected Shortfall (ES). 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 MES. We then suggest how to improve the evaluation of MES by means of a second-order approximation.

On the evaluation of marginal expected shortfall / Caporin, Massimiliano; Santucci de Magistris, Paolo. - In: APPLIED ECONOMICS LETTERS. - ISSN 1466-4291. - 19:2(2012), pp. 175-179. [10.1080/13504851.2011.570704]

On the evaluation of marginal expected shortfall

Santucci de Magistris, Paolo
2012

Abstract

In the analysis of systemic risk, Marginal Expected Shortfall (MES) may be considered to evaluate the marginal impact of a single stock on the market Expected Shortfall (ES). 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 MES. We then suggest how to improve the evaluation of MES by means of a second-order approximation.
marginal expected shortfall, market log-returns, systemic risk, second-order approximation
On the evaluation of marginal expected shortfall / Caporin, Massimiliano; Santucci de Magistris, Paolo. - In: APPLIED ECONOMICS LETTERS. - ISSN 1466-4291. - 19:2(2012), pp. 175-179. [10.1080/13504851.2011.570704]
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/178225
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