Backtesting expected shortfall pdf

Backtesting expected shortfall introducing three model. We propose a new backtesting framework for expected shortfall that could be used by the regulator. Abstract in recent years, the question of whether expected shortfall is possible to backtesthasbeenahottopicafterthe. Backtesting trading risk of commercial banks using. The basel committee on banking supervision bis has recently sanctioned expected shortfall es as the market risk measure to be used for banking regulatory purposes, replacing the wellknown value at. October 27, 2014 abstract the discovery in 2011 that the expected shortfall es is not elicitable, di used the erroneous belief that it could not be backtested. Backtesting extreme value theory models of expected shortfall november 2018 quantitative finance, vol. The first had limited circulation, being distributed at the firms 1994 annual research conference, which was in budapest. Ziegel and tilmann gneiting comment on the role of elicitability in. A simple traffic light approach to backtesting expected shortfall.

Pdf a simple traffic light approach to backtesting. Backtesting general spectral risk measures with application to expected shortfall. Pdf backtesting general spectral risk measures with. The basel committee on banking supervision bis has recently sanctioned expected shortfall es as the market risk measure to be used for banking regulatory purposes, replacing the wellknown valueatrisk var.

Pdf individual and flexible expected shortfall backtesting. Backtesting value at risk and expected shortfall simona. In addition, the comparative backtesting framework could be used by banks internally as well as by researchers to guide selection of forecasting methods. Wong wk 2010 backtesting valueatrisk based on tail losses. Expected shortfall es backtesting workflow using simulation. A quantitative evaluation johan engvall kth royal institute of technology school of engineering sciences. Currently, there is an intensive debate about two risk measures. Expected shortfall estimation and backtesting matlab. Expected shortfall has better properties than var, so if its backtestable, there is no reason to use the var test anymore, which was a debatable choice in the first place, says fabrizio anfuso, head of counterparty credit risk. The discovery in 2011 that the expected shortfall es is not elicitable, diffused the erroneous belief that it could not be backtested. Instead of looking at the estimated capital reserve and the realised cash. The discussion focuses on three risk measures, value at risk, expected shortfall and expectiles, and is supported by a simulation study and data analysis. An expected shortfall approach timotheos angelidis department of economics, university of crete, gallos campus,74100 rethymno, greece email address.

Backtesting bootstrap valueatrisk and expected shortfall. Backtesting marginal expected shortfall and related. That is, the expected loss on the days when the loss exceeds var. This change is motivated by the appealing theoretical properties of es as a measure of risk and the poor ones of var. Individual and flexible expected shortfall backtesting article pdf available in journal of risk model validation 73. The discovery in 2011 that the expected shortfall es. Pdf we propose a new backtesting framework for expected shortfall that could be used by the regulator.

Jp morgans riskmetrics technical document was released in four editions between 1994 and 1996. The null and alternative hypotheses can be written as h 0. Rockafellar and uryasev, acerbi and tasche, define expected shortfall es, aka cvar, a coherent measure of risk 2000s var and es are widely adopted by financial institutions as complementary tools 20. Es is an expected value of a tail distribution and does not fulll the conditions for. Stavros degiannakis department of statistics, athens university of economics and business, 76, patision. Backtesting principles testing strategies recommandations introduction the valueatrisk var and more generally the distortion risk measures expected shortfall, etc. Expected shortfall remains difficult to backtest, though, because of the way it is defined as an average of losses in excess of a given var level. Expected shortfall es backtesting workflow with no model distribution information. Finding a calibration function for expected shortfall a natural approach to backtesting expected shortfall estimates is to look for a calibration function, that is a function h such that ehest t. Hence, banks now face the paradox of using the es for the computation of their market risk capital requirements and the valueatrisk for the backtesting. Wong wk 2008 backtesting trading risk of commercial banks using expected shortfall. This misconception aroused a number of criticisms to the recent decision of. Averaging multiple scenarios to calculate expected shortfall. If the var is 10 million and the es is 12 million, we know the expected loss tomorrow.

Backtesting, valueatrisk, expected shortfall, volatility forecasting, arch models. Nevertheless some recent backtesting methods have been proposed including, but not limited to, 1, 6, 8, 9, 11, 15. This example shows how to perform estimation and backtesting of expected shortfall models. Backtesting expected shortfall carlo acerbi and balazs szekelyy msci inc. More important, she investigates the issue related to the backtesting of expected shortfall. You can find a backtest for expected shortfall detailed in the paper below kerkhof, f. Backtesting expected shortfall a garchevtcopula approach masters thesis, 2015, 97 pages. Pdf new backtests for unconditional coverage of expected shortfall. For risk forecasts like valueatrisk var and expected shortfall es 1, the forecasting process often involves sophisticated models. Comparing backtests of valueatrisk and expected shortfall. The main contribution of the work is the application of test 1 and test 2 developed by acerbi and szekely 2014 on different models and for five global market indexes. With about 250 trading days in a year, observations correspond to around 4 years of data. Through the transition from value at risk var to expected shortfall es as the primary market risk. Wu wb 2007 mestimation of linear models with dependent errors.

Shortfall measures the expected loss in the tail of the distribution. This misconception aroused a number of criticisms to the recent decision of the basel committee to adopt es in spite of v ar. Using historical data, this example estimates var and es over a test window, using historical and parametric var approaches. The model itself is a source of risk in getting inadequate risk estimates, so assessing the model risk of risk measures becomes vital as could be seen during the global financial crisis when the pitfalls of inadequate modelling were revealed.

Accounting for tail risk zaichao duy southwestern university of finance and economics, china juan carlos escancianoz indiana university, united states of america august 24, 2015 abstract the basel committee on banking supervision bis has recently sanctioned ex. This situation is mainly due to the difficulty of finding an es back. Regression based expected shortfall backtesting arxiv. This example shows an expected shortfall es backtesting workflow with no model distribution information and the use of esbacktest object. What is the difference between these two expected shortfall definitions. First of all, we introduce three modelfree, nonparametric backtest methodologies for. While the valueatrisk var has been the standard risk measure for a long time, the expected shortfall es has become more and more popular in recent. Expected shortfall es is the expected loss on days when there is a valueatrisk var failure.

Accounting for tail risk, forthcoming in management science. Contents risk measures and their properties elicitability backtesting var and es empirical analysis matlab code. Es n es 0, where es 0 denotes theoretical expected shortfall under the null hypothesis. Valueatrisk var and expected shortfall es must be estimated together because the es estimate depends on the var estimate. Var to an expected shortfall risk measurement approach.