In the course Commercial Bank Management, my teacher talked about the measurement methods of risk management in commercial banks, such as VaR, which integrates the risk of different sources into one number. At the same time, VaR does not satisfy subadditivity, which means that it does not conform to the coherent risk measurement system, and it cannot measure the maximum loss beyond the probability. Based on it, Artzner proposed Expected Shortfall (ES) to measure the expected loss beyond VaR, making this concept subadditive and reflecting a fat-tail problem in risk distribution. This indicator seems to be so advantageous that the Basel Committee proposed to adopt ES as a substitute indicator in Basel III.

However, is ES more accurate than VaR? In Dr Jon Danielsson’s paper Why risk is so hard to measure, I found that the accuracy of VaR is slightly higher than ES, especially when the tail of the distribution is fatter and the sample size is smaller, through the results of mathematical calculations, Monte Carlo simulation and empirical analysis by Jon. In the heavy-tailed distribution, ES is a multiple of VaR, which means that “If ES is needed, the end-user might just as well estimate VaR and multiply it by a constant.” However, because of the theoretical advantages of ES and its difficulty to manipulate, most people still choose to use ES as a better risk indicator.

These arguments led me to understand that even the most commonly used methods of risk management have many shortcomings, waiting for researchers to improve. For example, the assumptions in the calculation of VaR and ES, which does not meet the normal distribution, make them less precise in real market; Systemic Expected Shortfall (SEC) proposed by Professor Viral V. Acharya et al. in 2017 is only applicable to bank system, which means it doesn't explain the overall risk well. On the other hand, as finance increasingly affects the lifeblood of global development and the real economy nowadays, the measurement and management of financial risk are particularly crucial for both enterprises and countries. So I aspire to learn about risk management and get a PhD in this field, exploring the measurement methods of various risks, further relaxing assumptions to make the measurement more consistent with the human condition and real situation of the market, and combining the advantages and disadvantages of each method to create comprehensive regulatory indicators.

In addition, I aspire to include macro environment changes when conducting research, especially government policies, since government supervision is the most critical part of the financial system, and sometimes even a subtle change can lead to violent market reaction. The financial crisis of 2008 broke out with the collapse of Lehman Brothers and then spread to the whole world, but I found through querying the materials that in the past 10 years of history, a series of policies and acts have quietly foreshadowed the crisis. The adoption of the Gramma-Leach-Bliley Act in 1999 allowed commercial banks to merge with investment banks, abolishing part of the Glass-Steagall Act and creating greater moral hazard. When derivatives started to grow explosively in the late 1990s, there was no law to regulate this market. The promulgation of the Commodity Futures Modernization Act in 2000 even facilitated the unethical trading of derivatives. The principle of [University Name]’s Systemic Risk Centre says that “financial risk is created by the interaction of market participants”, but the negligence of these policies has intensified improper interaction in the financial market to some extent, paving the way for Black Swan incidents.

Having a strong academic background, many academic experts, and an excellent location, [University Name] is the ideal school in my mind. I have previously used the KMV model to analyse the credit risk of a single company and used MATLAB to perform binary tree analysis and option pricing. The elective course Quantitative Methods for Finance and Risk Analysis allows me to learn more about the application of MATLAB in financial risk models, which can enable me to do further research on risk. More importantly, Dr Jon Danielsson’ s research in financial risk and crisis is in line with my academic interest, so I aspire to learn and discuss with him about risk and crisis at [University Name]. Dr Jon’s research in volatility and financial crisis shows me that prolonged periods of low volatility do predict financial crises, because “low volatility is followed by credit build-up, indicating that economic agents take more risk in periods of low financial risk, which in turn endogenously increases the likelihood of future crises.” This topic helps me learn more about the relationship between financial market risk and the macroeconomy and inspires me to consider both high and low volatilities when I set crisis indicators in my further research. Dr Jon has also done research about the relationship between banks and system risk. Although the article shows that it’s quite difficult to develop a sound and reliable risk meter, I believe Dr Jon can provide me with more views about the reliability of systemic risk measurements and its relationship with macroprudential policy. In addition, [University Name]’ s Systemic Risk Centre (SRC) often holds high-quality events and seminars, and publishes opinion pieces and discussion papers, providing me with a global platform to understand the cutting-edge theories of systemic risk and to communicate with scholars and governments around the world, which is very helpful for cultivating my financial literacy and improving academic level. I still remembered SRC’s special paper published in September 2018 about the reflection of the global financial crisis in 2008. The interview of Nouriel Roubini and [University Name]lo Rosa clearly shows me an overall perspective of that crisis, especially the lesson having been learned from it, such as that banks should implement counter-cyclical capital buffers to combat the fragility of the system in excellent times. Through study in [University Name], I aspire to lay a solid academic foundation, put forward my own opinions and communicate with these experts shortly. And I am looking forward to starting my exciting journey in London with you soon.