Financial Resilience Evaluation: From Conditional Expectations to Dynamic Convex Risk Measures

Financial resilience concerns the rate at which a position recovers, or further deteriorates, in response to adverse conditions.

As a first step, Laeven, Ferrari, Rosazza Gianin, and Zullino (arXiv:2505.07502) introduced the resilience rate, defined as the expected instantaneous rate of (favorable) change of a price or risk-assessment process.

Since this quantity captures only the conditional mean of future increments, it cannot distinguish between positions having the same expected recovery but different conditional risk profiles.

We obtain a richer characterization by evaluating such increments through a genuine, possibly nonlinear, dynamic risk measure.

More precisely, for an Itô process $\pi$ and a normalized, cash-additive dynamic risk measure $\rho$, we define the resilience evaluation by \[\mathcal D_s^\rho\pi_t := L^1\text{-}\lim_{\varepsilon\to0^+} \frac{1}{\varepsilon}\rho_s(\pi_{t+\varepsilon}-\pi_t), \qquad 0\leq s\leq t<T,\] whenever the limit exists.

When $\rho$ is a convex dynamic risk measure induced by a BSDE with a Lipschitz or quadratic driver, we prove that this limit is well-posed and admits an explicit dual representation.

It is given by the worst-case conditional expectation, over a zero-penalty class of measure changes, of an effective drift combining the drift of $\pi$ with the risk adjustment assigned by $\rho$ to its volatility.

We further establish attainment of the optimal scenario and illustrate the scope of the construction, as well as the role of the assumptions, through examples and counterexamples.