An axiomatic approach to default risk and model uncertainty in rating systems

“We discuss different properties and representations of default #riskmeasures via monetary risk measures, families of related #tailrisk measures, and Choquet capacities. In a second step, we turn our focus on #defaultrisk measures, which are given as worst-case [#probability of #default] PDs and distorted PDs. The latter are frequently used in order to take into account model risk for the computation of #capitalrequirements through risk-weighted assets […]

The Probability Conflation: A Reply

We respond to Tetlock et al. (2022) showing 1) how expert judgment fails to reflect tail risk, 2) the lack of compatibility between forecasting tournaments and tail risk assessment methods (such as extreme value theory). More importantly, we communicate a new result showing a greater gap between the properties of tail expectation and those of […]

Risk Measures: Robustness, Elicitability, and Backtesting

“…we argue that… the median shortfall—that is, the median of the tail loss distribution—is a better option than the expected shortfall for setting the Basel Accords capital requirements due to statistical and economic considerations such as capturing tail risk, robustness, elicitability, backtesting, and surplus invariance.” Lire