Enhancement of Market Risk Models - shift from VaR to Expected Shortfall based methodology for an European Investment Bank
Client : Large European Investment Bank
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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
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