Department of Economics and Business Economics

On the evaluation of marginal expected shortfall

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In the analysis of systemic risk, Marginal Expected Shortfall may be considered to evaluate the marginal impact of a single stock on the market Expected Shortfall. These quantities are generally computed using log-returns, in particular when there is also a focus on returns conditional distribution. In this case, the market log-return is only approximately equal to the weighed sum of equities log-returns. We show that the approximation error is large during turbulent market phases, with a subsequent impact on Marginal Expected Shortfall.
We then suggest how to improve the evaluation of Marginal Expected Shortfall by means of a second order approximation.
Original languageEnglish
JournalApplied Economics Letters
Volume19
Issue2
Pages (from-to)175-179
ISSN1350-4851
DOIs
Publication statusPublished - 2012

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