Value-at-risk and expected shortfall using the unbiased extreme value volatility estimator

Purpose - This paper aims to propose a framework based on the unbiased extreme value volatility estimator (namely, the AddRS estimator) to compute and predict the long position and the short position value-at-risk (VaR) and stressed expected shortfall (ES). The precise prediction of VaR and ES measures has important implications toward financial institutions, fund managers, portfolio managers, regulators and business practitioners. Design/methodology/approach - The proposed framework is based on the Giot and Laurent (2004) approach and incorporates characteristics like long memory, fat tails and skewness. The authors evaluate its VaR and ES forecasting performance using various backtesting approaches for both long and short positions on four global indices (S&P 500, CAC 40, Indice BOVESPA [IBOVESPA] and S&P CNX Nifty) and compare the results with that of various alternative models. Findings - The findings indicate that the proposed framework outperforms the alternative models in predicting the long and the short position VaR and stressed ES. The findings also indicate that the VaR forecasts based on the proposed framework provide the least total loss for various long and short position VaR, and this supports the superior properties of the proposed framework in forecasting VaR more accurately. Originality/value - The study contributes by providing a framework to predict more accurate VaR and stressed ES measures based on the unbiased extreme value volatility estimator.