FEER Index - Forecasting Extreme Events Risk

Abstract

In 2008, the S&P500 aggregated a loss of 30.16% during three selected days. Unfortunately, benchmark risk measures didn't forecast these hazards. Consequently, we witness a growing interest in coherent risk measures, sensitive to high moments and heavy tail risk. Such measures were proposed by Aumann-Serrano (2007) and Foster-Hart (2008). As a generalization of these measures, we construct the FEER Index, coherent down-side risk measure "Forecasting Extreme Events Risk", sensitive to heavy tail risk. We present closed-form solution as a function of the return moments, V aR and CV aR. Furthermore, the FEER Index is dynamically calibrated to the market, becoming a live seismograph for market catastrophes.