JSM 2011 Online Program

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Abstract Details

Activity Number: 308
Type: Contributed
Date/Time: Tuesday, August 2, 2011 : 8:30 AM to 10:20 AM
Sponsor: Section on Risk Analysis
Abstract - #301711
Title: Systematic Risk Under Extremely Adverse Market Conditions
Author(s): Chen Zhou*+ and Maarten van Oordt
Companies: Erasmus University and De Nederlandsche Bank
Address: P.O. Box 1738, Rotterdam, International, 3000DR, The Netherlands
Keywords: systematic risk ; tail dependence ; extreme value theory ; Value-at-Risk
Abstract:

Extreme losses are the major concern in risk management. The dependence between financial assets and the market portfolio changes under extremely adverse market conditions. We develop a measure of systematic tail risk, the tail regression beta, defined by an asset's sensitivity to large negative market shocks, and establish the estimation methodology.

Building on extreme value theory, the estimator of the tail regression beta consists of the asymptotic dependence measure and the marginal risk measures. Theoretically, it has a similar structure as the estimator of the regular beta from regression analysis. Simulations show that our estimation methodology yields an estimator that has a lower mean squared error than performing regressions in the tail.

Empirical results based on analyzing 46 industrial portfolios demonstrate that the regular systematic risk measure is in general different from the systematic tail risk in severe market downturns. Furthermore, the tail regression beta is a useful instrument in both portfolio risk management and systemic risk management. We demonstrate its applications in analyzing Value-at-Risk (VaR) and Conditional Value-at-Risk (CoVaR).


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