Template-type: ReDIF-Paper 1.0
Author-Name: Chia-Lin Chang
Author-Workplace-Name: Department of Applied Economics Department of Finance National Chung Hsing University Taichung, Taiwan.
Author-Name: Juan-Ángel Jiménez-Martín
Author-Workplace-Name:
 Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa). Universidad Complutense de Madrid.
Author-Workplace-Homepage:
 https://www.ucm.es/fundamentos-analisis-economico2
Author-Name: Esfandiar Maasoumi
Author-Workplace-Name:
 Department of EconomicsEmory University, USA
Author-Name: Michael McAleer
Author-Workplace-Name: Department of Quantitative Finance National Tsing Hua University, Taiwan
Author-Name: Teodosio Pérez-Amaral
Author-Workplace-Name:
 Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa). Universidad Complutense de Madrid.
Author-Workplace-Homepage:
 https://www.ucm.es/fundamentos-analisis-economico2
Title: A Stochastic Dominance Approach to the Basel III Dilemma: Expected Shortfall or VaR?
Abstract: The Basel Committee on Banking Supervision (BCBS) (2013) recently proposed shifting the quantitative risk metrics system from 
	Value-at-Risk (VaR) to Expected Shortfall (ES). The BCBS (2013) noted that “a number of weaknesses have been identified with 
	using VaR for determining regulatory capital requirements, including its inability to capture tail risk” (p. 3). For this 
	reason, the Basel Committee is considering the use of ES, which is a coherent risk measure and has already become common in the 
	insurance industry, though not yet in the banking industry. While ES is mathematically superior to VaR in that it does not 
	show “tail risk” and is a coherent risk measure in being subadditive, its practical implementation and large calculation 
	requirements may pose operational challenges to financial firms. Moreover, previous empirical findings based only on means and 
	standard deviations suggested that VaR and ES were very similar in most practical cases, while ES could be less precise because 
	of its larger variance. In this paper we find that ES is computationally feasible using personal computers and, contrary to 
	previous research, it is shown that there is a stochastic difference between the 97.5% ES and 99% VaR. In the Gaussian case, 
	they are similar but not equal, while in other cases they can differ substantially: in fat-tailed conditional distributions, on 
	the one hand, 97.5%-ES would imply higher risk forecasts, while on the other, it provides a smaller down-side risk than using 
	the 99%-VaR. It is found that the empirical results in the paper generally support the proposals of the Basel Committee.
Classification-JEL: G32, G11, G17, C53, C22.
Keywords: Stochastic dominance, Value-at-Risk, Expected Shortfall, Optimizing strategy, Basel III Accord.

Length: 40 pages 
Creation-Date: 2015-11  
Number: 2015-16
X-File-Ref: http://america.sim.ucm.es/repec/ucm/ref/doicae1516.txt
File-URL: https://eprints.ucm.es/id/eprint/34141/1/1516.pdf
File-Format: Application/pdf
Handle: RePEc:ucm:doicae:1516