We compare expected shortfall and value-at-risk (VaR) in terms of consistency with expected utility maximization and elimination of tail risk. We use the concept of stochastic dominance in studying these two aspects of risk measures. We conclude that expected shortfall is more applicable than...

We compare expected shortfall with value-at-risk (VaR) in three aspects: estimation errors, decomposition into risk factors, and optimization. We describe the advantages and the disadvantages of expected shortfall over VaR. We show that expected shortfall is easily decomposed and optimized while...

Valuation of the conversion option is essential in analyzing the market price of a convertible bond. In this paper, we use a binomial tree pricing model to derive the implied volatility of the conversion option from the past price information (time-series data for individual issues) in the...

The common practice for managing the credit risk of lending portfolios is to the calculate the maximum loss within the "value at risk" framework. Most financial institutions use large-scale Monte Carlo simulations to do this. However, such simulations may impose heavy calculation loads. This...

Value-at-risk (VaR) has become a standard measure used in financial risk management due to its conceptual simplicity, computational facility, and ready applicability. However, many authors claim that VaR has several conceptual problems. Artzner et al. (1997, 1999), for example, have cited the...

In this paper, we compare value-at-risk (VaR) and expected shortfall under market stress. Assuming that the multivariate extreme value distribution represents asset returns under market stress, we simulate asset returns with this distribution. With these simulated asset returns, we examine...

In this paper, we analyze model risks separately in pricing models and risk measurement models as follows. (1) In pricing models, model risk is defined as "the risk arising from the use of a model which cannot accurately evaluate market prices, or which is not a mainstream model in the market."...

In the dynamic factor model, a single unobserved factor common to some macroeconomic variables is defined as a composite index to measure business cycles. This model has recently been developed by combining with the regime switching model so that the mean growth of the index may shift depending...