ABSTRACT
Recent large financial disasters have called for the need of accurate risk measures for financial institutions and regulators. Most of the existing literature use volatility to measure risk and concentrate on modeling volatility spillover. Needless to say, volatility is an important instrument in finance and macroeconomics. However, it can only adequately represent small risks. When monitoring financial risk, the probability of a large adverse market movement is always of greater practical concern (e.g. Bollerslev 2001). Volatility alone cannot satisfactorily capture risk in scenarios of occasionally occurring extreme market movement. Moreover, it includes both gains and losses in a symmetric way. Intuitively, financial risk is obviously associated with losses but not profits. Also, practical constraints often require asymmetric treatment between upside potential and downside risk. Therefore, a sensible measure of risk should be associated with large losses, or large adverse market movements. Furthermore, it is well-known in the literature that financial markets may tend to be more prone to incurring large losses during volatile periods than during tranquil periods.1
