A1003
Title: Systemic and systematic risks driven marginal expected shortfall
Authors: Deyuan Li - Fudan University (China) [presenting]
Abstract: Marginal expected shortfall (MES) may be referred to the expected loss of a particular equity during the occurrence of a system-wide stress event (SWSE) or equivalently systemic risk and/or systematic risk (SRSR) in a system. The existing MES literature only considers the occurrence of SWSE being an index return dropping below a prescribed threshold, which can be insufficient in characterizing an SWSE, and hence can be largely underestimating the expected loss of the equity. An SWSE is innovatively defined as a representative index return dropped below a prescribed threshold or the worst performed individual equity's return dropped below a prescribed threshold, extending the MES to the innovative systemic and systematic risks driven marginal expected shortfall (SYS2MES). Estimators for SYS2MES are constructed, and their asymptotic theories are established within the multivariate extreme value theory framework. The results cover both the tail-dependent and tail-independent cases and thus can be applied to a wide range of models. The finite sample performance of the estimators is investigated in a simulation study. Applying SYS2MES to Dow Jones' 30 stocks led to better and more meaningful results than the original MES. The new results make invaluable market risk measurements and management.
