Individual and Flexible Expected Shortfall Backtesting

Journal of Risk Model Validation, 7 (3), 3-20, 2013.

12 Pages Posted: 4 Oct 2012 Last revised: 2 May 2014

See all articles by Marcelo Righi

Marcelo Righi

Universidade Federal do Rio Grande do Sul (UFRGS)

Paulo Sergio Ceretta

Universidade Federal de Santa Maria

Date Written: June 20, 2013

Abstract

In this paper we propose an expected shortfall (ES) backtesting approach that uses the dispersion of a truncated distribution by the estimated value-at-risk (VaR) upper limit, does not limit the approach to the Gaussian case and allows us to test if each individual VaR violation is significantly different from the ES. Moreover, we present a Monte Carlo simulation algorithm to determine the significance of the backtest. We provide an empirical illustration that demonstrates the advantages that our backtests provide, especially the fact that there is no need to wait for a whole backtest period in order to prove the prediction that the ES test is inefficient.

Keywords: Expected Shortfall, Shortfall Deviation, Backtest, Monte Carlo Simulations

Suggested Citation

Righi, Marcelo and Ceretta, Paulo Sergio, Individual and Flexible Expected Shortfall Backtesting (June 20, 2013). Journal of Risk Model Validation, 7 (3), 3-20, 2013., Available at SSRN: https://ssrn.com/abstract=2155659 or http://dx.doi.org/10.2139/ssrn.2155659

Marcelo Righi (Contact Author)

Universidade Federal do Rio Grande do Sul (UFRGS) ( email )

Washington Luis, 855
Porto Alegre, Rio Grande do Sul 90010-460
Brazil

Paulo Sergio Ceretta

Universidade Federal de Santa Maria ( email )

Santa Maria
Brazil

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