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Risks 2018, 6(2), 61; https://doi.org/10.3390/risks6020061

On Exactitude in Financial Regulation: Value-at-Risk, Expected Shortfall, and Expectiles

1
College of Law, Michigan State University, 648 North Shaw Lane, East Lansing, MI 48824-1300, USA
2
Visiting Scholar, School of Economics and Business, University of Zagreb (Ekonomski Fakultet, Sveučilište u Zagrebu), J.F. Kennedyja Trg 6, 10000 Zagreb, Croatia
Received: 8 April 2018 / Revised: 24 May 2018 / Accepted: 28 May 2018 / Published: 1 June 2018
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Abstract

This article reviews two leading measures of financial risk and an emerging alternative. Embraced by the Basel accords, value-at-risk and expected shortfall are the leading measures of financial risk. Expectiles offset the weaknesses of value-at-risk (VaR) and expected shortfall. Indeed, expectiles are the only elicitable law-invariant coherent risk measures. After reviewing practical concerns involving backtesting and robustness, this article more closely examines regulatory applications of expectiles. Expectiles are most readily evaluated as a special class of quantiles. For ease of regulatory implementation, expectiles can be defined exclusively in terms of VaR, expected shortfall, and the thresholds at which those competing risk measures are enforced. Moreover, expectiles are in harmony with gain/loss ratios in financial risk management. Expectiles may address some of the flaws in VaR and expected shortfall—subject to the reservation that no risk measure can achieve exactitude in regulation. View Full-Text
Keywords: expectiles; risk measures; expected shortfall; value-at-risk; VaR; Basel accords; elicitability; coherence; backtesting; robustness; gain/loss ratios expectiles; risk measures; expected shortfall; value-at-risk; VaR; Basel accords; elicitability; coherence; backtesting; robustness; gain/loss ratios
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).
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Chen, J.M. On Exactitude in Financial Regulation: Value-at-Risk, Expected Shortfall, and Expectiles. Risks 2018, 6, 61.

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