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Monitoring Value-at-Risk and Expected Shortfall Forecasts

Author

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  • Yannick Hoga

    (Faculty of Economics and Business Administration, University of Duisburg-Essen, D–45117 Essen, Germany)

  • Matei Demetrescu

    (Department of Statistics, TU Dortmund University, D–44221 Dortmund, Germany)

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.

Suggested Citation

  • Yannick Hoga & Matei Demetrescu, 2023. "Monitoring Value-at-Risk and Expected Shortfall Forecasts," Management Science, INFORMS, vol. 69(5), pages 2954-2971, May.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:5:p:2954-2971
    DOI: 10.1287/mnsc.2022.4460
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    References listed on IDEAS

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    Cited by:

    1. Beutner, Eric & Heinemann, Alexander & Smeekes, Stephan, 2024. "A residual bootstrap for conditional Value-at-Risk," Journal of Econometrics, Elsevier, vol. 238(2).
    2. Sullivan Hu'e & Christophe Hurlin & Yang Lu, 2024. "Backtesting Expected Shortfall: Accounting for both duration and severity with bivariate orthogonal polynomials," Papers 2405.02012, arXiv.org, revised May 2024.
    3. Christis Katsouris, 2023. "Quantile Time Series Regression Models Revisited," Papers 2308.06617, arXiv.org, revised Aug 2023.

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