Objective

To help a large European investment bank switch from VaR to Expected Shortfall methodology by enhancing market risk models.

CRISIL's Solution

• Assessed and enhanced a suite of market risk models across asset classes in a limited amount of time
  
• Completed the following analyses to assess the impact of changing risk numbers from the standard 99% percentile VaR methodology to the expected shortfall methodology:
  
• The following analyses were carried out to assess the impact of changing the risk numbers from the standard 99% percentile VaR methodology to the expected shortfall methodology
  
  • Equivalence: ES with the standard 99% percentile VaR;
  • Theoretical Analysis: establishment of the equivalence of ES for both normal and thick- tail distributions;
  • Stability: Established that ES is marginally more stable than VaR using entropy analysis;
  • Concluding Analyses: Established that the ES 98% is greater than the 99% percentile VaR, validating the choice for the final specification.
    

Client Impact

• Using remote access to the client’s systems, CRISIL executed all analyses relevant for the methodology change exercise and provided appropriate documentation
• Documentation submitted to the client’s high-level risk committee for sign-off to satisfy applicable regulatory requirements
• Model validation facilitated a seamless transition to Expected Shortfall methodology
  

Questions

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