engleski

Interaction of value at risk and expected shortfall: application to Zagreb stock exchange

We look at the interaction between the well established Value at risk (VaR) and a “coherent” risk measure Expected shortfall (ES). Although a superior risk measure ES is not accepted by the regulators for the purpose of calculating economic capital. Furthermore, the concept of ES is lagging behind VaR when it comes to empirical research, model comparison and backtesting methodology. VaR and ES are connected in the sense that from the VaR surface we can easily calculate ES. We test a wide range of VaR and ES models at high confidence levels (95, 99 and 99, 5%) during the ongoing financial crisis on Zagreb stock exchange index - CROBEX. The obtained results in VaR and ES estimation show consistency in that the best performing VaR models are identical to the best performing ES models. Our findings point to the conclusion that the strong points and weaknesses of every model remain with them and that is why knowledge obtained in developing VaR models should not be forsaken. Knowing both figures leads to better understanding of risks an institution is facing. As we show VaR estimation techniques can easily be adopted to serve a new coherent risk measure – ES.

Expected shortfall, Value at Risk, Extreme value theory, Zagreb stock exchange, CROBEX

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