Determination of Capital Adequacy to Cover Market Risks in the Russian Stock Market Taking into Account Model Risk

Student: Zubritskaya Anna

Educational Programme: Financial Markets and Financial Institutions (Master)

Year of Graduation: 2019

At the moment, the two most popular risk metrics are VaR and ES. In accordance with the norms of Basel, VaR is used to determine the capital requirements for risk coverage. However, after the release of the Basel Committee of the FRTB (2016), there is a gradual transition to the use of ES instead of VaR in the world. In this dissertation, these two metrics are compared in terms of model risk in order to assess the consequences of such a transition. Criticism of VaR due to the lack of risk of subadditivity and the ability to reflect “tail risks” is opposed to criticism of ES due to the impossibility of its direct backtesting, since this risk measure does not have the “elicitability” property. This paper considers that ES is also not a stable metric towards various sources of model risk. ES demonstrates higher sensitivity to data, incorrect specification, volatility and lack of robustness.

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