External risk measures and Basel accords. (English) Zbl 1297.91089

Kou, Steven; Peng, Xianhua; Heyde, Chris C.

Math. Oper. Res. 38, No. 3, 393-417 (2013).

Summary: Choosing a proper external risk measure is of great regulatory importance, as exemplified in the Basel II and Basel III Accords, which use value-at-risk with scenario analysis as the risk measures for setting capital requirements. We argue that a good external risk measure should be robust with respect to model misspecification and small changes in the data. A new class of data-based risk measures called natural risk statistics is proposed to incorporate robustness. Natural risk statistics are characterized by a new set of axioms. They include the Basel II and III risk measures and a subclass of robust risk measures as special cases; therefore, they provide a theoretical framework for understanding and, if necessary, extending the Basel Accords.

MSC:

91B30	Risk theory, insurance (MSC2010)
91B08	Individual preferences

Keywords:

financial regulation; capital requirements; risk measure; scenario analysis; robustness; expected shortfall; median shortfall; value-at-risk