Comparative backtesting of the ES

  • Title : Comparative backtesting of the Expected Shortfall
  • Authors : Dr. Valentin Dendoncker and Dr. Adrien Lebègue
  • Date : October 2019
  • Reference : Reacfin White Paper 2019 vol. 2
  • Key words : Banks - Financial institutions - Basel3 - IMA - Marketrisk - Actuarial science - Actuaries

In Basel 3, a bank that intends to use an internal models approach (IMA) must conduct, among other requirements, some backtesting. The new standards for the minimum capital requirements for market risk, adopted in 2016 and revised in 2019, introduce a shift from a Value-at-Risk (VaR) measure to an Expected Shortfall (ES) measure. This shift brings some challenges regarding the (comparative) backtesting of the IMA. In this White Paper, we propose a review of the literature regarding the comparative backtesting of the VaR and ES measures, and highlight a method relying on the concept of elicitability for the backtesting of the ES.Dr. Valentin Dendoncker and Dr. Adrien Lebègue