RSM432H1 Lecture Notes - Lecture 2: Coherent Risk Measure, Expected Shortfall, Capital Requirement
Document Summary
Lecture 2: value at risk and expected shortfall. Represents loss level we are x% confident will not be exceeded in n business days. Days should be best estimate of how long it takes to get out of entire position. As time increases, var increases by square root multiple ( if mean is 0) Is a single number to explain risk of bank. Want banks to have enough capital to survive potential loss. Market-risk capital is k times 10-day 99% var. Have regulatory obligation to report 10-day 99% var. Under basel ii, capital for credit risk and operational risk is based on one-year 99. 9% var. Is measure of how bad things can get for portfolio. Portfolios can be constructed to meet var requirements. Does not translate well to non-linear products, shocks in market because assumes normal distribution. Expected shortfall is expected loss given that loss is greater than var level. Tow portfolios with same var can have very different expected shortfalls.
