EVT-based Approach for Implementing FRTB Guidelines on ES

The Basel Committee on Banking Supervision (BCBS) has proposed to replace value at risk (VaR) with expected shortfall (ES). There are many reasons behind this proposal, and we have provided a brief description of the pros and cons of this shift in this paper. Estimating extreme losses is important when measuring market risk and the extreme value theory (EVT) approach is one of the best methods to calculate extreme losses..

Key Takeaways

The reasons for the regulatory shift from VaR to ES.
Regulatory guidance on modeling ES.
Importance of using an EVT based approach for modeling ES.
Step-by-step details on how to model ES with EVT.

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