THE UNEXPECTED SHORTFALL: AN ALTERNATIVE RISK MEASURE

Yıl 2023, Cilt: 7 Sayı: 2, 110 - 130, 18.10.2023

Ekrem Kılıç

Öz

The international prudential regulation standard – the Basel standards – introduces a substantial
change to its market risk framework. The change is part of a comprehensive revision of the standard
to address the weaknesses discovered during the global financial crisis (GFC) of 2008. One of the key
changes is the replacement of Value-at-Risk (VaR) with Expected Shortfall (ES) as the primary risk
measure in the framework. By incorporating the tail events, ES partially answers the concerns raised
about the VaR during the GFC. However, ES as well lacks a mechanism to extrapolate the historical
shocks. This paper proposes an alternative measure – unexpected shortfall (US) – which aims to serve
as a better safety barrier for financial institutions. Based on the evidence from 3 conventional currency
pairs (EUR/USD, USD/TRY, EUR/TRY) and 1 cryptocurrency pair (BTC/USD), the new measure
displayed violations in a reasonably close range of the expected values and backtest analyses suggested
that the incurred excessive losses for US are less than both VaR and ES.

Anahtar Kelimeler

Market Risk, Capital Adequacy, Value at Risk, Expected Shortfall, Basel IV, FRTB

Kaynakça

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