Es is an expected value of a tail distribution and does not fulll the conditions for. An expected shortfall approach timotheos angelidis department of economics. We propose a traffic light approach to backtesting expected shortfall which is completely consistent with, and analogous to, the traffic light approach to backtesting var value at risk initially proposed by the basel committee on banking supervision in their 1996 consultative document basle committee on banking supervision 1996. It was believed that es could not be backtested since it is not elicitable. Averaging multiple scenarios to calculate expected shortfall. Comparative backtesting of the expected shortfall by dr. No investment decisions should be made in reliance on this material. Backtesting value at risk and expected shortfall ebook. An application to emerging market stock indices article pdf available in risk management 2. Degree project in mathematics, second cycle, 30 credits stockholm, sweden 2016 backtesting expected shortfall. In backtesting, the prediction is an entire distribution, but the realisation is a single scenario.
A simple traffic light approach to backtesting expected. Value at risk var models ken abbott developed for educational use at mit and for publication through mit opencourseware. Embraced by the basel accords, valueatrisk and expected shortfall are the leading measures of financial risk. Value at risk var models mit opencourseware free online. Indeed, expectiles are the only elicitable lawinvariant coherent risk measures. Download backtesting valueatrisk models book pdf free download link or read online here in pdf. Backtesting marginal expected shortfall and related systemic. Expected shortfall es measure for the internal models approach. All books are in clear copy here, and all files are secure so dont worry about it.
Backtesting expected shortfall for tail risk in this section, some preliminary definitions of var and es are first provided, followed by the definition of the sample es statistic to be used in backtesting. But no general backtest method for expected shortfall had ever been discovered moreover, many financial experts concluded that expected shortfall cant be backtested because of this debate, the basel committee suggested. We develop a new backtesting framework for expected shortfall by building on the standard valueatrisk procedure. Carlo acerbi and balazs szekely introduce a backtest. 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. Backtesting expected shortfall msci solves this dilemma by proving that elicitability does not imply backtestability this proof actually shows a simple method to backtest es msci introduces three modelindependent, nonparametric backtest methodologies for es. Early work on backtesting expected shortfall can be found in 23, 5, 18. Our test gives a single decision at a specified confidence level and is perfectly consistent with the binomial test for var. Instead of looking at the estimated capital reserve and the realised cash. 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. The debate on the backtestability of expected shortfall es is almost as old as the risk measure itself.
In particular, we propose the use of dieboldmariano tests, and show how they can be implemented for expected shortfall es, based on the recent result of fissler and ziegel 2015 that es is jointly elicitable with value at risk. Backtesting bootstrap valueatrisk and expected shortfall. Regression based expected shortfall backtesting arxiv. 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. Feel free to check our online resources for more information and free material. Adopting expected shortfall to measure risk, but continuing to use value at risk for backtesting 6. For risk forecasts like valueatrisk var and expected shortfall es 1, the forecasting process often involves sophisticated models.
Backtesting expected shortfall introducing three model. Backtesting value at risk and expected shortfall simona. Particular attention is given to the special case of expected shortfall. This function implements multiple expected shortfall regression esreg based backtests. Expectiles offset the weaknesses of valueatrisk var and expected shortfall. Expected shortfall es is the expected loss on days when there is a valueatrisk var failure. Recent results have shown backtests of expected shortfall es are necessarily approximated, in the sense that they are unavoidably sensitive to possible errors in the prediction of valueatrisk. Unlike its preceding risk metrics, the backtesting approach for is still underdeveloped due to the claim that it is not elicitable. Three easytoimplement methods for backtesting expected shortfall the discovery that expected shortfall es is not elicitable propagated the belief that it could not be backtested and aroused a number of criticisms of the basel committees adoption of es over valueatrisk.
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. Backtesting a period of forecast distributions of risk f t, computed for each day t, tests the hypothesis that the expected shortfall based reserve is su cient to cover adverse events. We propose a new backtesting framework for expected shortfall that could be used by the regulator. Instead of looking at the estimated capital reserve and the realised cashflow separately, one. Comparing backtests of valueatrisk and expected shortfall. Contents risk measures and their properties elicitability backtesting var and es empirical analysis matlab code. 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. In this paper, the authors introduce a new es backtesting framework based on the duality between coherent risk measures and scaleinvariant performance measures. A new framework for the joint estimation and forecasting of dynamic value at risk var and expected shortfall es is proposed by our incorporating intraday information into a generalized.
In the second equation we have an extra continuity correction term. The free accessibility of the riskmetrics and the plethora of available. The discovery in 2011 that the expected shortfall es is not elicitable, diffused the erroneous belief that it could not be backtested. First, a presentation of the context in which the backtesting of expected shortfall takes place will be provided. 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.
Most backtesting frameworks that i have found test explicitly var or es i am aware of the difficulties of backtesting es and these backtests are not comparable and it is seems hard to infer if e. To put it bluntly, the committee is now facing a dilemma of. First of all, we introduce three modelfree, nonparametric backtest methodologies for. An expected shortfall approach timotheos angelidis department of economics, university of crete, gallos campus,74100 rethymno, greece email address. Expected shortfall, backtesting, mincerzarnowitz regression, forecast evaluation, model. Stavros degiannakis department of statistics, athens university of economics and business, 76, patision. A simple traffic light approach to backtesting expected shortfall. 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 risk var. Pdf individual and flexible expected shortfall backtesting. Expected shortfall, backtests, valueatrisk, elicitability. Backtesting, valueatrisk, expected shortfall, volatility forecasting, arch.
This misconception aroused a number of criticisms to the recent decision of. Backtesting extreme value theory models of expected shortfall november 2018 quantitative finance, vol. Despite warnings from prominent quants that the measure was unsuitable because no backtest existed, the basel committee chose to adopt it as the standard measure for the calculation of market risk capital requirements prompting numerous. Backtesting expected shortfall a garchevtcopula approach masters thesis, 2015, 97 pages. Pdf new backtests for unconditional coverage of expected shortfall. A simple implicit approach to backtesting expected shortfall marie kratz, yen h. First of all, we introduce three modelfree, nonparametric backtest methodologies for expected shortfall which are shown to be more powerful than the basel v.
You can find a backtest for expected shortfall detailed in the paper below kerkhof, f. Comparative backtesting of the expected shortfall reacfin. Backtesting software free download backtesting top 4 download. Read online backtesting valueatrisk models book pdf free download link book now.
In recent years, the question of whether expected shortfall is possible to. For example, you can create userdefined trafficlight tests and run the es backtesting analysis over rolling windows. Backtesting trading risk of commercial banks using expected. This context starts with calculation and backtesting methodologies of the valueatrisk, followed by a focus on the es, analysing its calculation and how it defers from the previous risk measure. Backtesting value at risk and expected shortfall request pdf. 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.
Wu wb 2007 mestimation of linear models with dependent errors. Backtesting valueatrisk models pdf book manual free download. Valueatrisk, expected shortfall, backtesting, basel iii, frtb, risk. In this note, we present a simple, practical and easily implementable coverage test to backtest any spectral risk measure. 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 valu. This misconception aroused a number of criticisms to the recent decision of the basel committee to adopt es in spite of v ar. Overview of expected shortfall backtesting expected shortfall es is the expected loss on days when there is a valueatrisk var failure. More important, she investigates the issue related to the backtesting of expected shortfall. Backtesting marginal expected shortfall and related systemic risk measures denisa banulescu, christophe hurliny, j er emy leymarie z, olivier scaillet x february, 2016 preliminary version please do not cite abstract this paper proposes two backtesting tests to assess the validity of the systemic risk measure forecasts. 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. A quantitative evaluation johan engvall kth royal institute of technology school of engineering sciences. Accounting for tail risk article pdf available in management science 634 march 2016 with 1,702 reads how we measure reads. Expected shortfall estimation and backtesting matlab. Hsiao yen lok heriot watt university di erent methods of backtesting var and es may 17, 2015 14 26.
Top 4 download periodically updates software information of backtesting full versions from the publishers, but some information may be slightly outofdate using warez version, crack, warez passwords, patches, serial numbers, registration codes, key generator, pirate key, keymaker or keygen for backtesting license key is illegal. Backtesting value at risk and expected shortfall springerlink. Pdf a simple traffic light approach to backtesting. Backtesting valueatrisk models pdf book manual free. First of all, we introduce three model free, nonparametric backtest methodologies for. 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.
Pdf we propose a new backtesting framework for expected shortfall that could be used by the regulator. Consider a portfolio a ected by risk factors, and the goal is to compute risk estimates such as var and es. Under basel iii, expected shortfall es will be the main risk measure since it is a coherent risk measure as opposed to valueatrisk var bis 2016. 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. Instead of looking at the estimated capital reserve and the. Wong wk 2010 backtesting valueatrisk based on tail losses. Individual and flexible expected shortfall backtesting article pdf available in journal of risk model validation 73. Model risk of expected shortfall lancaster university. If the var is 10 million and the es is 12 million, we know the expected loss tomorrow. Wong wk 2008 backtesting trading risk of commercial banks using expected shortfall. Expected shortfall regression backtest in bayerseesback. 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. Contribute to bayerseesback development by creating an account on github.
Expected shortfall backtest create an expected shortfall es backtest model and run suite of es backtests expected shortfall es provides an estimate of the expected. Backtesting expected shortfall carlo acerbi and balazs szekelyy msci inc. In this note, we comment on the relevance of elicitability for backtesting risk measure estimates. Despite certain drawbacks, valueatrisk var and expected shortfall es.