What is the best risk measure in practice? A comparison of standard measures

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Title: What is the best risk measure in practice? A comparison of standard measures
Authors: Emmer, S
Kratz, M
Tasche, D
Item Type: Journal Article
Abstract: Expected shortfall (ES) has been widely accepted as a risk measure that is conceptually superior to value-at-risk (VaR). At the same time, however, it has been criticized for issues relating to backtesting. In particular, ES has been found not to be elicitable, which means that backtesting for ES is less straightforward than, for example, backtesting for VaR. Expectiles have been suggested as potentially better alternatives to both ES and VaR. In this paper, we revisit the commonly accepted desirable properties of risk measures such as coherence, comonotonic additivity, robustness and elicitability. We check VaR, ES and expectiles with regard to whether or not they enjoy these properties, with particular emphasis on expectiles. We also consider their impact on capital allocation, an important issue in risk management. We find that, despite the caveats that apply to the estimation and backtesting of ES, it can be considered a good risk measure. As a consequence, there is no sufficient evidence to justify an all-inclusive replacement of ES by expectiles in applications. For backtesting ES, we propose an empirical approach that consists of replacing ES by a set of four quantiles, which should allow us to make use of backtesting methods for VaR.
Issue Date: 17-Nov-2015
Date of Acceptance: 5-Feb-2015
URI: http://hdl.handle.net/10044/1/47882
DOI: 10.21314/JOR.2015.318
ISSN: 1465-1211
Publisher: Incisive Media
Start Page: 31
End Page: 60
Journal / Book Title: Journal of Risk
Volume: 18
Issue: 2
Keywords: q-fin.RM
62P05, 91B30
1502 Banking, Finance And Investment
Publication Status: Published
Appears in Collections:Financial Mathematics
Faculty of Natural Sciences

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