Backtesting Marginal Expected Shortfall and Related Systemic Risk Measures

Denisa Banulescu-Radu (), Christophe Hurlin, Jérémy Leymarie and Olivier Scaillet
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Denisa Banulescu-Radu: Laboratoire d'Economie d'Orleans, University of Orléans, 45067 Orléans, France

Management Science, 2021, vol. 67, issue 9, 5730-5754

Abstract: This paper proposes an original approach for backtesting systemic risk measures. This backtesting approach makes it possible to assess the systemic risk measure forecasts used to identify the financial institutions that contribute the most to the overall risk in the financial system. Our procedure is based on simple tests similar to those generally used to backtest the standard market risk measures such as value-at-risk or expected shortfall. We introduce a concept of violation associated with the marginal expected shortfall (MES), and we define unconditional coverage and independence tests for these violations. We can generalize these tests to any MES-based systemic risk measures such as the systemic expected shortfall (SES), the systemic risk measure (SRISK), or the delta conditional value-at-risk ( Δ CoVaR). We study their asymptotic properties in the presence of estimation risk and investigate their finite sample performance via Monte Carlo simulations. An empirical application to a panel of U.S. financial institutions is conducted to assess the validity of MES, SRISK, and Δ CoVaR forecasts issued from a bivariate GARCH model with a dynamic conditional correlation structure. Our results show that this model provides valid forecasts for MES and SRISK when considering a medium-term horizon. Finally, we propose an early warning system indicator for future systemic crises deduced from these backtests. Our indicator quantifies how much is the measurement error issued by a systemic risk forecast at a given point in time which can serve for the early detection of global market reversals.

Keywords: backtesting; banking regulation; hypothesis testing; risk management; systemic risk (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (6)

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http://dx.doi.org/10.1287/mnsc.2020.3751 (application/pdf)

Related works:
Working Paper: Backtesting Marginal Expected Shortfall and Related Systemic Risk Measures (2021)
Working Paper: Backtesting marginal expected shortfalland related systemic risk measures (2020)
Working Paper: Backtesting Marginal Expected Shortfall and Related Systemic Risk Measures (2020)
Working Paper: Backtesting Marginal Expected Shortfall and Related Systemic Risk Measures (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:67:y:2021:i:9:p:5730-5754

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