Analytical Value-at-Risk and Expected Shorfall under Regime Switching Articles uri icon



publication date

  • September 2009

start page

  • 138

end page

  • 151


  • 3


  • 6

International Standard Serial Number (ISSN)

  • 1544-6123

Electronic International Standard Serial Number (EISSN)

  • 1544-6131


  • It is well known that the use of Gaussian models to assess financial risk leads to an underestimation of risk. The reason is because these models are unable to capture some important facts such as heavy tails and volatility clustering which indicate the presence of large fluctuations in returns. An alternative way is to use regime-switching models, the latter are able to capture the previous facts. Using regime-switching model, we propose an analytical approximation for multi-horizon conditional Value-at-Risk and a closed-form solution for conditional Expected Shortfall. By comparing the Value-at-Risks and Expected Shortfalls calculated analytically and using simulations, we find that the both approaches lead to almost the same result. Further, the analytical approach is less time and computer intensive compared to simulations, which are typically used in risk management.