On the Role of the Estimation Error in Prediction of Expected Shortfall

19 Pages Posted: 14 Sep 2012

Date Written: September 13, 2012

Abstract

In the estimation of risk measures such as Value at Risk and Expected shortfall relatively short estimation windows are typically used rendering the estimation error a possibly non-negligible component. In this paper we build upon previous results for the Value at Risk and discuss how the estimation error comes into play for the Expected Shortfall. We identify two important aspects where it may be of importance. On the one hand there is in the evaluation of predictors of the measure. On the other there is in the interpretation and communication of it. We illustrate magnitudes numerically and emphasize the practical importance of the latter aspect in an empirical application with stock market index data.

Keywords: Backtesting, Delta method, Finance, GARCH, Risk Management

JEL Classification: G19, C52, C53, C58, G10

Suggested Citation

Lönnbark, Carl and Lönnbark, Carl, On the Role of the Estimation Error in Prediction of Expected Shortfall (September 13, 2012). Available at SSRN: https://ssrn.com/abstract=2146009 or http://dx.doi.org/10.2139/ssrn.2146009

Carl Lönnbark (Contact Author)

Umeå University ( email )

Samhallsvetarhuset, Plan 2
Umea University
Umeå, SE 901 87
Sweden

Swedbank ( email )

SE-105 34 Stockholm
Sweden

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