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

Carl Lönnbark

No 844, Umeå Economic Studies from Umeå University, Department of Economics

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.

Keywords: Backtesting; Delta method; Finance; GARCH; Risk Management (search for similar items in EconPapers)
JEL-codes: C52 C53 C58 G10 G19 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2012-08-16
New Economics Papers: this item is included in nep-fmk, nep-for and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:umnees:0844

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