Non-parametricbacktesting of expected shortfall

University essay from KTH/Matematisk statistik

Abstract: Since the Basel Committee on Banking Supervision first suggested a transition to Expected Shortfall as the primary risk measure for financial institutions, the question on how to backtest it has been widely discussed. Still, there is a lack of studies that compare the different proposed backtesting methods. This thesis uses simulations and empirical data to evaluate the performance of non-parametric backtests under different circumstances. An important takeaway from the thesis is that the different backtests all use some kind of trade-off between measuring the number of Value at Risk exceedances and their magnitudes. The main finding of this thesis is a list, ranking the non-parametric backtests. This list can be used to choose backtesting method by cross-referencing to what is possible to implement given the estimation method that the financial institution uses. 

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