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Complementing Expected Shortfall with Directly Observable Risk Variables

Johansson, Pontus LU (2021) NEKP01 20211
Department of Economics
Abstract (Swedish)
This paper uses daily MSCI Sweden Index data to create one day out ES estimates on the $97.5\%$ percentile level for a SEK 100 portfolio.
Thereafter the variables (i) the Riksbank's policy rate, (ii) the Riksbank's balance sheet, (iii) the cyclicality of GDP, and (iv) animal spirits are introduced and compared with ES. As the variables are thought to affect financial markets, they are evaluated in regards to ES to see if the addition of them in an analysis improves estimation of the 2.5% worst losses. If ES does not incorporate signals of risk shown by the variables, increased predictive ability for losses is achieved by including the variables in an analysis. The results indicate that (i), (ii), and (iv) are worth including in addition... (More)
This paper uses daily MSCI Sweden Index data to create one day out ES estimates on the $97.5\%$ percentile level for a SEK 100 portfolio.
Thereafter the variables (i) the Riksbank's policy rate, (ii) the Riksbank's balance sheet, (iii) the cyclicality of GDP, and (iv) animal spirits are introduced and compared with ES. As the variables are thought to affect financial markets, they are evaluated in regards to ES to see if the addition of them in an analysis improves estimation of the 2.5% worst losses. If ES does not incorporate signals of risk shown by the variables, increased predictive ability for losses is achieved by including the variables in an analysis. The results indicate that (i), (ii), and (iv) are worth including in addition to ES when estimating the cost of the 2.5% largest losses of a stock index. (Less)
Please use this url to cite or link to this publication:
author
Johansson, Pontus LU
supervisor
organization
course
NEKP01 20211
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Expected shortfall, Tailrisk, Index Investing, Risk Management, Finance
language
English
id
9062420
date added to LUP
2021-08-17 14:47:22
date last changed
2021-08-17 14:47:22
@misc{9062420,
  abstract     = {{This paper uses daily MSCI Sweden Index data to create one day out ES estimates on the $97.5\%$ percentile level for a SEK 100 portfolio. 
Thereafter the variables (i) the Riksbank's policy rate, (ii) the Riksbank's balance sheet, (iii) the cyclicality of GDP, and (iv) animal spirits are introduced and compared with ES. As the variables are thought to affect financial markets, they are evaluated in regards to ES to see if the addition of them in an analysis improves estimation of the 2.5% worst losses. If ES does not incorporate signals of risk shown by the variables, increased predictive ability for losses is achieved by including the variables in an analysis. The results indicate that (i), (ii), and (iv) are worth including in addition to ES when estimating the cost of the 2.5% largest losses of a stock index.}},
  author       = {{Johansson, Pontus}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Complementing Expected Shortfall with Directly Observable Risk Variables}},
  year         = {{2021}},
}