A1349
Title: Worst-case higher moment risk measures: Addressing procyclicality and stress-testing
Authors: Carlos Castro-Iragorri - Colegio Mayor de Nuestra Senora del Rosario (Colombia) [presenting]
Fabio Gomez - University of New South Wales Sydney (Australia)
Abstract: The worst-case higher moment (HM) risk measure is a generalization of the expected shortfall (ES). The aim is to propose a robust solution to address distributional shifts by incorporating adaptive features into the worst-case HM risk measure. This approach offers two key advantages: first, it provides a mechanism to mitigate the inherent procyclicality of risk measures like ES; second, it allows for parametric adjustments to the risk measure, enabling the generation of diverse scenarios for stress testing. Empirical analysis using historical S\&P 500 returns demonstrates that worst-case HM risk measures significantly reduce the underestimation of risk and offer more stable risk assessments throughout financial cycles compared to traditional ES predictions. These findings suggest that worst-case HM risk measures could serve as a viable alternative to regulatory add-ons for stress testing and procyclicality mitigation in financial risk management.
