Estimating and backtesting risk under heavy tails

Marcin Pitera and Thorsten Schmidt

Insurance: Mathematics and Economics, 2022, vol. 104, issue C, 1-14

Abstract: While the estimation of risk is an important question in the daily business of banking and insurance, many existing plug-in estimation procedures suffer from an unnecessary bias. This often leads to the underestimation of risk and negatively impacts backtesting results, especially in small sample cases. In this article we show that the link between estimation bias and backtesting can be traced back to the dual relationship between risk measures and the corresponding performance measures, and discuss this in reference to value-at-risk, expected shortfall and expectile value-at-risk.

Keywords: Value-at-risk; Expected shortfall; Estimation of risk capital; Bias; Risk estimation; Backtesting; Unbiased estimation of risk measures; Generalized Pareto distribution (search for similar items in EconPapers)
JEL-codes: C01 C13 C58 G17 G21 G32 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:104:y:2022:i:c:p:1-14

DOI: 10.1016/j.insmatheco.2022.01.006

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