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On the role of the estimation error in prediction of expected shortfall

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  • Lönnbark, Carl

    () (Department of Economics, Umeå University)

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.

Suggested Citation

  • Lönnbark, Carl, 2012. "On the role of the estimation error in prediction of expected shortfall," Umeå Economic Studies 844, Umeå University, Department of Economics.
  • Handle: RePEc:hhs:umnees:0844
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    Keywords

    Backtesting; Delta method; Finance; GARCH; Risk Management;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G19 - Financial Economics - - General Financial Markets - - - Other

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