Estimating and backtesting risk under heavy tails

DOI10.1016/J.INSMATHECO.2022.01.006MaRDI QIDQ2138613zbMATH OpenOpenAlexFDO

Authors Yanyan Li

Publication date 12 May 2022

Published in Insurance Mathematics \& Economics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2010.09937

zbMATH Keywords

expected shortfallbiasgeneralized Pareto distributionrisk estimationvalue-at-riskbacktestingestimation of risk capitalunbiased estimation of risk measures

Mathematics Subject Classification ID

Statistics of extreme values; tail inference (62G32) Statistical methods; risk measures (91G70)

Abstract: While the {estimation} of risk is an important question in the daily business of banking and insurance, many existing plug-in estimation procedures suffer from an unnecessary bias. This often leads to the underestimation of risk and negatively impacts backtesting results, especially in small sample cases. In this article we show that the link between estimation bias and backtesting can be traced back to the dual relationship between risk measures and the corresponding performance measures, and discuss this in reference to value-at-risk, expected shortfall and expectile value-at-risk. Motivated by the consistent underestimation of risk by plug-in procedures, we propose a new algorithm for bias correction and show how to apply it for generalized Pareto distributions to the i.i.d. setting and to a GARCH(1,1) time series. In particular, we show that the application of our algorithm leads to gain in efficiency when heavy tails or heteroscedasticity exists in the data.

Recommendations

• Backtesting Parametric Value-at-Risk With Estimation Risk
• ESTIMATION OF RISK MEASURES FROM HEAVY TAILED DISTRIBUTIONS
• Backtesting extreme value theory models of expected shortfall
• Backtesting aggregate risk
• Efficiently Backtesting Conditional Value-at-Risk and Conditional Expected Shortfall
• Backtesting portfolio value‐at‐risk with estimated portfolio weights
• Backtesting expected shortfall and beyond
• A review of backtesting for value at risk
• Robust measurement of (heavy-tailed) risks: theory and implementation
• Comparing downside risk measures for heavy tailed distributions

Cites work

• scientific article; zbMATH DE number 735230 (Why is no real title available?)
• An application of extreme value theory for measuring financial risk
• Bootstrap consistency and bias correction in the nonparametric estimation of risk measures of collective risks
• Coherence and elicitability
• Comparative and qualitative robustness for law-invariant risk measures
• Distributionally robust inference for extreme value-at-risk
• Dynamic assessment indices
• Elicitability and backtesting: perspectives for banking regulation
• Making and evaluating point forecasts
• Nonparametric estimation of risk measures of collective risks
• Predictive Inference and Scientific Reproducibility
• Probability-unbiased Value-at-Risk estimators
• Quantitative risk management. Concepts, techniques and tools
• Robustness and sensitivity analysis of risk measurement procedures
• Statistical inference for expectile-based risk measures
• Verification of internal risk measure estimates

Cited in

(5)

• Backtesting Parametric Value-at-Risk With Estimation Risk
• Parametric expectile regression and its application for premium calculation
• On tail index estimation and financial risk management implications
• scientific article; zbMATH DE number 1538077 (Why is no real title available?)
• Backtesting portfolio value‐at‐risk with estimated portfolio weights

Describes a project that uses

Uses Software

• QRM

This page was built for publication: Estimating and backtesting risk under heavy tails

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2138613)