SUITABLE RISK MEASUREMENT OF CHINESE STOCK MARKET IN HIGH VOLATILITY PERIODS

Chinese economy nowadays receives impacts from various economic activities internationally and accordingly the risk measurement and management system is worthy of discussion. In the past two decades, the VaR and ES have been widely introduced and discussed. However, in a recent consultative document, the Basel Committee on Banking Supervision suggests replacing Value-at-Risk (VaR) by expected shortfall (ES) for setting capital requirements for banks' trading books because ES better captures tail risk than VaR. However, besides ES, another risk measure called median shortfall (MS) also captures tail risk by taking into account both the size and likelihood of losses. The study argues that MS is a better alternative than ES as a risk measure for setting capital requirements in China because: (1) MS is elicitable but ES is not; (2) MS has distributional robustness with respect to model misspecification but ES does not; (3) MS is easy to implement but ES is not. In this paper, properties of VaR, MS and ES (e.g. elicitability, robustness and sub-additivity) are critically compared. Together with comparison of properties, backdatings are used to give reference of accuracy. By the approach of backtesting (traffic light) of MS and VaR, we could see many similarities but differences from ES in the paper. This paper adopts the test statistics Z2 for ES backtesting. This study aims to study high-volatile periods of Chinese stock market and use conditional EVT which can capture tail risks incisively as an indicator to estimate VaR, MS and ES. Also, this study seeks to suggest a more suitable risk measure and management system for Chinese stock market especially in a high-risk period in line with the properties and accuracy.