Advanced

Are GARCH models necessary for Expected Shortfall?

Berggren, Erik LU (2017) STAH11 20162
Department of Statistics
Abstract
Following the Basel Committee on Banking Supervision’s decision to move from Value at Risk to Expected Shortfall, risk managers will have to alter their methods for reporting risk. This paper sheds light on the question of which volatility models and distributional assumptions that works best for this new method of risk measurement by evaluating forecasts for the Swedish index OMXS30. The empirical results indicate that the choice of model becomes less important for Expected Shortfall than for Value at Risk, and that the Student’s t distributed Value at Risk model improves accuracy compared to a normally distributed model. The EWMA model, proposed by the RiskMetrics Group, as well as the IGARCH and GJR-GARCH models generates adequate Value... (More)
Following the Basel Committee on Banking Supervision’s decision to move from Value at Risk to Expected Shortfall, risk managers will have to alter their methods for reporting risk. This paper sheds light on the question of which volatility models and distributional assumptions that works best for this new method of risk measurement by evaluating forecasts for the Swedish index OMXS30. The empirical results indicate that the choice of model becomes less important for Expected Shortfall than for Value at Risk, and that the Student’s t distributed Value at Risk model improves accuracy compared to a normally distributed model. The EWMA model, proposed by the RiskMetrics Group, as well as the IGARCH and GJR-GARCH models generates adequate Value at Risk estimates at the 97.5 percent confidence level. (Less)
Please use this url to cite or link to this publication:
author
Berggren, Erik LU
supervisor
organization
course
STAH11 20162
year
type
M2 - Bachelor Degree
subject
keywords
Forecasting, Backtesting, Value at Risk, Expected Shortfall, GARCH models
language
English
id
8902182
date added to LUP
2017-02-10 11:09:29
date last changed
2017-02-10 11:09:29
@misc{8902182,
  abstract     = {Following the Basel Committee on Banking Supervision’s decision to move from Value at Risk to Expected Shortfall, risk managers will have to alter their methods for reporting risk. This paper sheds light on the question of which volatility models and distributional assumptions that works best for this new method of risk measurement by evaluating forecasts for the Swedish index OMXS30. The empirical results indicate that the choice of model becomes less important for Expected Shortfall than for Value at Risk, and that the Student’s t distributed Value at Risk model improves accuracy compared to a normally distributed model. The EWMA model, proposed by the RiskMetrics Group, as well as the IGARCH and GJR-GARCH models generates adequate Value at Risk estimates at the 97.5 percent confidence level.},
  author       = {Berggren, Erik},
  keyword      = {Forecasting,Backtesting,Value at Risk,Expected Shortfall,GARCH models},
  language     = {eng},
  note         = {Student Paper},
  title        = {Are GARCH models necessary for Expected Shortfall?},
  year         = {2017},
}