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Forecasting Expected Shortfall: Should we use a Multivariate Model for Stock Market Factors?

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  • Fortin, Alain-Philippe

    (HEC Montreal, Canada Research Chair in Risk Management)

  • Simonato, Jean-Guy

    (HEC Montreal, Department of Finance)

  • Dionne, Georges

    (HEC Montreal, Canada Research Chair in Risk Management)

Abstract

Is univariate or multivariate modelling more effective when forecasting the market risk of stock portfolios? We examine this question in the context of forecasting the one-week-ahead Expected Shortfall of a portfolio invested in the Fama-French and momentum factors. Applying extensive tests and comparisons, we find that in most cases there are no statistically significant differences between the forecasting accuracy of the two approaches. This result suggests that univariate models, which are more parsimonious and simpler to implement than multivariate models, can be used to forecast the downsize risk of equity portfolios without losses in precision.

Suggested Citation

  • Fortin, Alain-Philippe & Simonato, Jean-Guy & Dionne, Georges, 2018. "Forecasting Expected Shortfall: Should we use a Multivariate Model for Stock Market Factors?," Working Papers 18-4, HEC Montreal, Canada Research Chair in Risk Management, revised 25 Jun 2021.
    • Handle: RePEc:ris:crcrmw:2018_004
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    More about this item

    Keywords

    Value-at-Risk; Expected Shortfall; Conditional Value-at-Risk; Elicitability; model comparison; backtesting; Fama-French and momentum factors;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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