On Vulnerability Conditional Risk Measures: Comparisons and Applications in Cryptocurrency Market

TL;DR

This paper introduces Vulnerability Conditional risk measures to assess tail risk in financial distress scenarios, providing theoretical properties, backtesting methods, and empirical validation in the cryptocurrency market.

Contribution

It proposes a new class of systemic risk measures, develops backtesting procedures, and demonstrates their practical application in cryptocurrency risk analysis.

Findings

Vulnerability Conditional risk measures effectively capture tail risk during financial distress.

Backtesting procedures validate the robustness of the proposed risk measures.

Empirical analysis shows practical relevance in cryptocurrency markets.

Abstract

We introduce a novel class of systemic risk measures, the Vulnerability Conditional risk measures, which try to capture the "tail risk" of a risky position in scenarios where one or more market participants is experiencing financial distress. Various theoretical properties of Vulnerability Conditional risk measures, along with a series of related contribution measures, have been considered in this paper. We further introduce the backtesting procedures of VCoES and MCoES. Through numerical examples, we validate our theoretical insights and further apply our newly proposed risk measures to the empirical analysis of cryptocurrencies, demonstrating their practical relevance and utility in capturing systemic risk.