Monitoring Value-at-Risk and Expected Shortfall Forecasts

Yannick Hoga () and Matei Demetrescu
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Yannick Hoga: Faculty of Economics and Business Administration, University of Duisburg-Essen, D–45117 Essen, Germany

Management Science, 2023, vol. 69, issue 5, 2954-2971

Abstract: This paper introduces formal monitoring procedures as a risk-management tool. Continuously monitoring risk forecasts allows practitioners to swiftly review and update their forecasting procedures as soon as forecasts turn inadequate. Similarly, regulators may take timely action in case reported risk forecasts become poor. Extant (one-shot) backtests require, however, that all data are available prior to testing and are not informative of when inadequacies might have occurred. To monitor value-at-risk and expected shortfall forecasts “online”—that is, as new observations become available—we construct sequential testing procedures. We derive the exact finite-sample distributions of the proposed procedures and discuss the suitability of asymptotic approximations. Simulations demonstrate good behavior of our exact procedures in finite samples. An empirical application to major stock indices during the COVID-19 pandemic illustrates the economic benefits of our monitoring approach.

Keywords: risk measures; backtests; sequential monitoring; exact distributions; forecasting (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:5:p:2954-2971

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