Murphy Diagrams: Forecast Evaluation of Expected Shortfall

Johanna F. Ziegel, Fabian Krueger, Alexander Jordan and Fernando Fasciati

No 632, Working Papers from University of Heidelberg, Department of Economics

Abstract: Motivated by the Basel 3 regulations, recent studies have considered joint forecasts of Value-at-Risk and Expected Shortfall. A large family of scoring functions can be used to evaluate forecast performance in this context. However, little intuitive or empirical guidance is currently available, which renders the choice of scoring function awkward in practice. We therefore develop graphical checks (Murphy diagrams) of whether one forecast method dominates another under a relevant class of scoring functions, and propose an associated hypothesis test. We illustrate these tools with simulation examples and an empirical analysis of S&P 500 and DAX returns.

Date: 2017-05-12
New Economics Papers: this item is included in nep-ecm and nep-rmg
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