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Non-parametricbacktesting of expected shortfall
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
2017 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesisAlternative title
Icke-parametrisk backtesting av expected shortfall (Swedish)
Abstract [en]

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. 

Abstract [sv]

Sedan Baselkommittén föreslog införandet av Expected Shortfall som primärt riskmått för finansiella institutioner, har det debatteras vilken backtesting metod som är bäst. Trots detta råder det brist på studier som utvärderar olika föreslagna backtest. I studien används simuleringar och historisk data för att utvärdera icke-parametriska backtests förmåga att under olika omständigheter upptäcka underskattad Expected Shortfall. En viktig iakttagelse är att alla de undersökta testen innebär ett avvägande i vilken utsträckning det skall detektera antalet och/eller storleken på Value at Risk överträdelserna. Studien resulterar i en prioriterad lista över vilka icke-parametriska backtest som är bäst. Denna lista kan sedan användas för att välja backtest utefter vad varje finansiell institution anser är möjligt givet dess estimeringsmetod.

Place, publisher, year, edition, pages
2017.
Series
TRITA-MAT-E, 2017:15
Keyword [en]
Backtesting Expected Shortfall; Non-parametric; Backtesting under Basel III; Backtesting under Fundamental review of the trading book.
National Category
Mathematical Analysis
Identifiers
URN: urn:nbn:se:kth:diva-207009OAI: oai:DiVA.org:kth-207009DiVA: diva2:1105331
External cooperation
Handelsbanken, Group Risk Control
Subject / course
Financial Mathematics
Educational program
Master of Science - Industrial Engineering and Management
Supervisors
Examiners
Available from: 2017-06-02 Created: 2017-06-02 Last updated: 2017-06-02Bibliographically approved

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