IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp1948.html
   My bibliography  Save this paper

Backtesting Marginal Expected Shortfall and Related Systemic Risk Measures

Author

Listed:
  • Denisa Banulescu

    (University of Orleans; Maastricht School of Business and Economics)

  • Christophe Hurlin

    (University of Orleans)

  • Jeremy Leymarie

    (University of Orleans)

  • O. Scaillet

    (University of Geneva GSEM and GFRI; Swiss Finance Institute; University of Geneva - Research Center for Statistics)

Abstract

This paper proposes an original approach for backtesting systemic risk measures. This backtesting approach makes it possible to assess the systemic risk measure forecasts used to identify the financial institutions that contribute the most to the overall risk in the financial system. Our procedure is based on simple tests similar to those generally used to backtest the standard market risk measures such as value-at-risk or expected shortfall. We introduce a concept of violation associated with the marginal expected shortfall (MES), and we define unconditional coverage and independence tests for these violations. We can generalize these tests to any MES-based systemic risk measures such as SES, SRISK, or ∆CoVaR. We study their asymptotic properties in the presence of estimation risk and investigate their finite sample performance via Monte Carlo simulations. An empirical application is then carried out to check the validity of the MES, SRISK, and ∆CoVaR forecasts issued from a GARCH-DCC model for a panel of U.S. financial institutions. Our results show that this model is able to produce valid forecasts for the MES and SRISK when considering a medium-term horizon. Finally, we propose an original early warning system indicator for future systemic crises deduced from these backtests. We then define an adjusted systemic risk measure that takes into account the potential misspecification of the risk model.

Suggested Citation

  • Denisa Banulescu & Christophe Hurlin & Jeremy Leymarie & O. Scaillet, 2019. "Backtesting Marginal Expected Shortfall and Related Systemic Risk Measures," Swiss Finance Institute Research Paper Series 19-48, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp1948
    as

    Download full text from publisher

    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3456052
    Download Restriction: no

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp1948. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ridima Mittal). General contact details of provider: http://edirc.repec.org/data/fameech.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.