Kratz, Marie, Lok, Yen Hsiao and McNeil, Alexander John orcid.org/0000-0002-6137-2890 (2018) Multinomial VaR Backtests:A simple implicit approach to backtesting expected shortfall. Journal of Banking and Finance. JBF-D-16-01251R1. pp. 393-407. ISSN 1872-6372
Abstract
Under the Fundamental Review of the Trading Book, capital charges are based on the coherent Expected Shortfall (ES) risk measure, which is sensitive to tail risk. We argue that backtesting of the forecasting models used to derive ES can be based on a multinomial test of Value-at-Risk (VaR) exceptions at several levels. Using simulation experiments with heavy-tailed distributions and GARCH volatility models, we design a statistical procedure to show that at least four VaR levels are required to obtain tests for misspecified trading book models that are more powerful than single-level (or even two-level) binomial exception tests. A traffic-light system for model approval is proposed and illustrated with three real-data examples spanning the 2008 financial crisis.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. |
Keywords: | Backtesting,Banking regulation,Expected shortfall,Financial risk management,Statistical test,Value-at-Risk |
Dates: |
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Institution: | The University of York |
Academic Units: | The University of York > Faculty of Social Sciences (York) > The York Management School |
Depositing User: | Pure (York) |
Date Deposited: | 18 Jan 2018 17:30 |
Last Modified: | 16 Oct 2024 14:23 |
Published Version: | https://doi.org/10.1016/j.jbankfin.2018.01.002 |
Status: | Published online |
Refereed: | Yes |
Identification Number: | 10.1016/j.jbankfin.2018.01.002 |
Related URLs: | |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:126410 |