Dynamic semiparametric models for expected shortfall (and Value-at-Risk)

Journal Article (Journal Article)

Expected Shortfall (ES) is the average return on a risky asset conditional on the return being below some quantile of its distribution, namely its Value-at-Risk (VaR). The Basel III Accord, which will be implemented in the years leading up to 2019, places new attention on ES, but unlike VaR, there is little existing work on modeling ES. We use recent results from statistical decision theory to overcome the problem of “elicitability” for ES by jointly modeling ES and VaR, and propose new dynamic models for these risk measures. We provide estimation and inference methods for the proposed models, and confirm via simulation studies that the methods have good finite-sample properties. We apply these models to daily returns on four international equity indices, and find the proposed new ES–VaR models outperform forecasts based on GARCH or rolling window models.

Full Text

Duke Authors

Cited Authors

  • Patton, AJ; Ziegel, JF; Chen, R

Published Date

  • August 1, 2019

Published In

Volume / Issue

  • 211 / 2

Start / End Page

  • 388 - 413

Electronic International Standard Serial Number (EISSN)

  • 1872-6895

International Standard Serial Number (ISSN)

  • 0304-4076

Digital Object Identifier (DOI)

  • 10.1016/j.jeconom.2018.10.008

Citation Source

  • Scopus