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Abstract |
This paper attempts to provide a decision theoretical foundation for measuring economic tail risk.
We prove that the only tail risk measure that satisfies a set of economic axioms proposed by Schmeidler (1989, Econometrica) and a statistical requirement called elicitability (i.e. there exists an objective function such that a reasonable estimator must be a solution of minimizing the expected objective function) is the median shortfall, which is the median of the tail loss distribution and is also the VaR at a high confidence level. Robust properties of the median shortfall, which is desirable for onsistent legal implementation in face of model uncertainty, are also discussed. We apply the concept of the median shortfall to study Basel Accords. This is a joint work with Xianhua Peng. |
