Backtesting, valueatrisk, expected shortfall, volatility. Szekely b backtesting expected shortfall, msci research paper. We also learned about stress testing our portfolios. An expected shortfall approach timotheos angelidis department of economics, university of crete, gallos campus,74100 rethymno, greece email address. Es is an alternative to value at risk that is more sensitive to the shape of the tail of the loss distribution. Var to an expected shortfall risk measurement approach. Abstract in recent years, the question of whether expected shortfall is possible to backtesthasbeenahottopicafterthe. 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. Backtesting marginal expected shortfall and related systemic. 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. Pdf the basel committee on banking supervision bis has recently sanctioned expected shortfall es as the market risk measure to be. 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. Valueatrisk, expected shortfall, backtesting, basel iii, frtb, risk. Expected shortfall es backtesting workflow using simulation.
Unlike its preceding risk metrics, the backtesting approach for is still underdeveloped due to the claim that it is not elicitable. Backtesting value at risk and expected shortfall springer. Backtesting expected shortfall a garchevtcopula approach marcel jager masters thesis mathematics applied mathematics. Backtesting trading risk of commercial banks using expected. This example shows an expected shortfall es backtesting workflow and the use of es backtesting tools. The expected shortfall at q% level is the expected return on the portfolio in the worst % of cases. An assessment of methodologies due to the crisis of 2008, the basel committee accelerated the process for update the accord and identified some weaknesses such as the inability of var to capture the tail risk. Stavros degiannakis department of statistics, athens university of economics and business, 76, patision. 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. In this note, we comment on the relevance of elicitability for backtesting risk measure estimates.
Expected shortfall es is the expected loss on days when there is a valueatrisk var failure. Strategy backtesting in excel strategy backtesting expert overview the backtesting expert is a spreadsheet model that allows you to create trading strategies using the technical indicators and running the strategies through historical data. See for instance yamai and yoshiba 01 last obstacle for the adoption of es in basel n. Expected shortfall, backtesting, mincerzarnowitz regression, forecast evaluation, model. It is found that four out of six us commercial banks have excessive trading risks. Backtesting trading book models using var, expected shortfall and realized pvalues alexander j.
In the second equation we have an extra continuity correction term. You can find a backtest for expected shortfall detailed in the paper below. Since the first method to estimate a var is based on the assumption that stock returns following a normal distribution, its accuracy depends how far, in the real world, stock returns. Expected shortfall es measure for the internal models approach. However, unlike the case of var, there is no wellestablished backtesting framework for expected shortfall. In finance, a stress test could be viewed as an analysis or simulation designed to determine the ability of a given financial instrument, such as a var to deal with an economic crisis. This situation is mainly due to the difficulty of finding an es back.
It is found that four out of six us commercial banks. Backtesting bootstrap valueatrisk and expected shortfall. 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. Indeed, the current basel proposal to backtest es at the 97. Banks will also need to run portfolio credit risk for the. 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.
A simple traffic light approach to backtesting expected shortfall. Backtesting trading risk of commercial banks using. Expected shortfall es is a risk measurea concept used in the field of financial risk measurement to evaluate the market risk or credit risk of a portfolio. The purpose of this thesis is to show that expected shortfall is in fact backtestable by providing six different examples of how a backtest could be designed without exploiting the property of elicitability. Indeed the current basel proposal to backtest es at the 97. To put it bluntly, the committee is now facing a dilemma of. Because the approximation is obtained by combining vars, our finding. A simple traffic light approach to backtesting expected. For more information, see esbacktest, esbacktestbysim, and esbacktestbyde. Backtesting expected shortfall carlo acerbi and balazs szekelyy msci inc. In the previous articles we learned a lot about how var is calculated using various methodologies.
In other cases, they advise the market practitioners to combine the two measures for best. Backtesting for the expected shortfall of the trading book. These tests use presimulated critical values for the. Instead of looking at the estimated capital reserve and the realised cashflow separately, one. 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. 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. As we are combining summing values of yk for different values of k. 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. Backtesting value at risk var prm exam iii, risk management. The esbacktest class supports two tests unconditional normal and unconditional t which are based on acerbiszekelys unconditional test statistic also known as the acerbiszekely second test. Let fr denotes the probability density function pdf of r. Mcneil1 1heriotwatt university, edinburgh vienna 10 june 2015 ajm hwu backtesting and elicitability qrm book launch 1 55. Expected shortfall is jointly elicitable with valueat.
Backtesting trading risk of commercial banks using expected shortfall. In recent years, the question of whether expected shortfall is possible to. 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. Our test gives a single decision at a speci ed con dence level and is perfectly.
We propose a new backtesting framework for expected shortfall that could be used by the regulator. Comparative backtesting of the expected shortfall reacfin. Contribute to bayerseesback development by creating an account on github. This example shows how to perform estimation and backtesting of expected shortfall models. We argue that backtesting of the forecasting models used to derive es can be based on a multinomial test of valueatrisk var exceptions at several levels. This paper uses saddlepoint technique to backtest the trading risk of commercial banks using expected shortfall. Backtesting marginal expected shortfall and related. The performance of the strategies can then be measured and analyzed quickly and easily. Most backtesting frameworks that i have found test explicitly var or es i am aware of the.
Monte carlo simulation studies show that the proposed backtest is very accurate and powerful even for small test samples. This misconception aroused a number of criticisms to the recent decision of. Msci demonstrates that backtesting expected shortfall is possible and could potentially replace value at risk var in the calculation of regulatory capital requirements new methodology ends debate as to whether expected shortfall can be backtested new york october 22, 2014 msci inc. More important, she investigates the issue related to the backtesting of expected shortfall. Valueatrisk var and expected shortfall es must be estimated together because the es estimate depends on the var estimate. Expected shortfall es provides an estimate of the expected loss on days when there is a var failure. 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. Backtesting general spectral risk measures with application to expected shortfall nick costanzino and mike curran abstract. The basel committee 1996 has set up a regulatory backtesting framework in order to monitor the frequency of exceptions but, due to the simplicity of the test, there is hardly a reason to use it in internal model validation processes when there are. Using historical data, this example estimates var and es over a test window, using historical and parametric var approaches. Degree project in mathematics, second cycle, 30 credits stockholm, sweden 2016 backtesting expected shortfall. This example shows an expected shortfall es backtesting workflow using simulation and the use of esbacktestbysim object.
In this note, we present a simple, practical and easily implementable coverage test to backtest any spectral risk measure. Regression based expected shortfall backtesting arxiv. A simple implicit approach to backtesting expected shortfall marie kratz, yen h. Combining this with its ability to capture extreme tail risks and its intuitive. Workshop on systemic risk and regulatory market risk measures pullach, germany, june 2014 carlo acerbi and balazs szekely testing expected shortfall june 2014 1 59. Workflow for expected shortfall es backtesting by du and escanciano. Expected shortfall es backtesting workflow with no model. Contents risk measures and their properties elicitability backtesting var and es empirical analysis matlab code. Financial mathematics credits master program me in. Expected shortfall es for the calculation of market risk capital requirements. Msci demonstrates backtesting expected shortfall is possible. Expected shortfall estimation and backtesting matlab. 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. However, new research has indicated that backtesting of expected shortfall is in fact possible and that it does not have to be very difficult.
But can we really rely on these var methods and accept the results they throw at us. Pdf a simple traffic light approach to backtesting. 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. However, it can be criticized on the ground that it does not convey the information of the potential loss that is expected if indeed an. Expected shortfall is jointly elicitable with valueatrisk. Abstract value at risk var has emerged as one of the most prominent risk measurement techniques in. Hsiao yen lok heriot watt university di erent methods of backtesting var and es may 17, 2015 14 26.
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