Authors: Athanasios Kokoris, Fragiskos Archontakis, Christos Grose

Title: Market Risk Assessment: Evidence from Packaged Retail and Insurance based Investment Products (PRIIPs)

Abstract

We look into the methodology proposed by the European Supervisory Authorities (ESAs) for the calculation of market risk of certain Packaged Retail and Insurance-based Investment Products (PRIIPs). ESAs have announced that the Unit-Linked (UL) products, labeled as Category II PRIIPs, will be subject to the Cornish-Fisher Value-at-Risk (CFVaR) methodology for their market risk assessment. Risk models are tested to validate the appropriateness of the methodology announced by ESAs. Initially, Historical Value-at-Risk (HVaR) and Historical Expected Shortfall (HES) are employed; these methods cannot incorporate the possibility of financial instability. Thus, the Cornish-Fisher (CF) expansion is introduced. When CFVaR by ESAs is calculated, it is shown that CF is more robust. However, when Cornish-Fischer Expected Shortfall (CFES) is applied, important points are derived. First, only in half of the occasions the CF expansion can be considered as a reliable method. Second, the CFES is a more coherent risk measure than CFVaR. We conclude that the CF expansion is unable to accurately estimate the market risk of UL products when excessive fat-tailed or non-symmetrical distributions are present. Hence, we suggest that a different methodology could be also considered by the regulatory bodies which will capture the excessive values of products in financial distress.