Model risk of expected shortfall

Lazar, E. ORCID: https://orcid.org/0000-0002-8761-0754 and Zhang, N. (2019) Model risk of expected shortfall. Journal of Banking and Finance, 105. pp. 74-93. ISSN 0378-4266 doi: 10.1016/j.jbankfin.2019.05.017

Abstract/Summary

In this paper we propose to measure the model risk of Expected Shortfall as the optimal correction needed to pass several ES backtests, and investigate the properties of our proposed measures of model risk from a regulatory perspective. Our results show that for the DJIA index, the smallest corrections are required for the ES estimates built using GARCH models. Furthermore, the 2.5% ES requires smaller corrections for model risk than the 1% VaR, which advocates the replacement of VaR with ES as recommended by the Basel Committee. Also, if the model risk of VaR is taken into account, then the corrections made to the ES estimates reduce by 50% on average.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/83837
Identification Number/DOI	10.1016/j.jbankfin.2019.05.017
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Elsevier
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