Forecast encompassing tests for the expected shortfall

Timo Dimitriadis and Julie Schnaitmann

International Journal of Forecasting, 2021, vol. 37, issue 2, 604-621

Abstract: We introduce new forecast encompassing tests for the risk measure Expected Shortfall (ES). The ES has received much attention since its introduction into the Basel III Accords, which stipulate its use as the primary market risk measure for international banking regulation. We utilize joint loss functions for the pair ES and Value at Risk to set up three ES encompassing test variants. The tests are built on an asymptotic theory that is robust to misspecifications. We investigate the finite sample properties of the tests in an extensive simulation study. Finally, we use the encompassing tests to illustrate the potential of forecast combination methods for different financial assets.

Keywords: Evaluating forecasts; Combining forecasts; Loss function; Model selection; Statistical tests (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:37:y:2021:i:2:p:604-621

DOI: 10.1016/j.ijforecast.2020.07.008

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