Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 844: On the role of the estimation error in prediction of expected shortfall

Carl Lönnbark ()
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Carl Lönnbark: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

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

JEL-codes: C52; C53; C58; G10; G19

19 pages, August 16, 2012

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