Forecast Encompassing Tests for the Expected Shortfall
Risk Management
2020-08-31 v3 Econometrics
Statistics Theory
Statistics Theory
Abstract
We introduce new forecast encompassing tests for the risk measure Expected Shortfall (ES). The ES currently receives much attention through its introduction into the Basel III Accords, which stipulate its use as the primary market risk measure for the international banking regulation. We utilize joint loss functions for the pair ES and Value at Risk to set up three ES encompassing test variants. The tests are built on misspecification robust asymptotic theory and we investigate the finite sample properties of the tests in an extensive simulation study. We use the encompassing tests to illustrate the potential of forecast combination methods for different financial assets.
Cite
@article{arxiv.1908.04569,
title = {Forecast Encompassing Tests for the Expected Shortfall},
author = {Timo Dimitriadis and Julie Schnaitmann},
journal= {arXiv preprint arXiv:1908.04569},
year = {2020}
}
Comments
International Journal of Forecasting (2020+, forthcoming)